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How a car loan affects your credit score

How a car loan affects your credit score

If you’re in the market for new set of wheels and you’re looking to buy on finance, you might be wondering – does a car loan affect your credit score? It’s certainly something worth considering when taking out any kind of credit product.

The reality is that all types of finance have the potential to affect your credit score, both positively and negatively, and at different stages of the borrowing process.

To get a better understanding of how a car loan could affect your credit score, it’s helpful to know how credit scores are calculated.

When determining your credit score, Australia’s major credit reporting bureaus, Experian and Equifax, take a range of factors into consideration, including:

  • Applications for credit
  • Used vs available credit
  • Types of credit
  • Repayment history
  • Length of credit history

The extent to which these factors may influence your credit score isn’t information that is publicly available. But it’s worth noting that a car loan can impact most of them in some way.

Will getting a car loan help my credit score?

Since the introduction of comprehensive credit reporting, credit providers are required to report positive credit events in addition to negative ones.

This means that your car loan could indeed help your credit score if you use the opportunity to consistently demonstrate responsible credit behaviours.

By regularly making your car loan repayments on time and putting in a concerted effort to avoid late payments, your repayment history could benefit your credit score.

Could getting a car loan hurt my credit score?

On the other hand, there are a few ways a car loan could potentially hurt your credit score, including the following scenarios:

1. Submitting multiple car loan applications:

Each time you apply for credit, the loan provider will run a credit check which is recorded on your credit file as a hard enquiry. If you submit multiple car loan applications at once, or in close succession, you could risk damaging your credit score.

2. Missing payments:

Forgetting to make your car loan repayments, or paying them after the due date has passed, could be detrimental to your credit score. Generally, the longer overdue the payment, the more serious the event will likely be considered, and the bigger impact it could have on your credit score.

But keep in mind, while a late payment of one or two days might not pose the biggest risk to your credit score, it’s likely you’ll still be hit with a late fee.

3. Paying off your car loan:

This one could seem counterintuitive, but it’s worth noting that reaching the end of your car loan term and making your final repayment could cause your credit score to dip initially. The main reason for this is because it will no longer be listed as an active account on your credit file, so if it’s your only form of credit or your longest held account, the length of your credit history will be shortened.

Longer credit histories tend to be more desirable to lenders as it allows them to see your credit behaviour over the long term. However, a potential credit score reduction as a result of paying off a loan will likely only be temporary – so it’s no reason to delay that final repayment.

What credit score is needed to get a car loan?

Credit providers typically determine car loan interest rates by credit score. Excellent credit borrowers will often be rewarded with the most competitive interest rates, while average or poor credit borrowers tend to be offered higher interest rates.

There isn’t a specific credit score that will guarantee approval for a car loan, but it tends to be the case that the higher your credit score, the more desirable you may be as a customer to lenders.

So, while a car loan has the potential to both positively and negatively affect your credit score, doing your due diligence and managing your credit responsibly can give you the tools you need to protect it as best you can.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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