How much will a car loan drop my credit score?

Buying a car is a big financial milestone for many — it means freedom from having to ask for a lift or being at the mercy of public transportation schedules. And choosing to purchase rather than lease a car can have many potential benefits, like a lower interest rate and better warranty.  Yet, many people worry about how it impacts credit and chew over the question, “How much does buying a car affect my credit score?”

If you’re starting to stress out just thinking of making a big purchase like a car, we get it. But this is where a little education can go a long way in calming your nerves.

We’ll outline the specifics of the question, “How much will a car loan drop my credit score?” Then, we’ll share more credit-related resources, like what credit is and the factors that impact your credit score and other financial considerations you should take into account when buying a car.

Does buying a car hurt your credit score?

Generally, a lender pulls (or gathers) your credit report and score when you apply for credit, which results in a hard inquiry on your credit report.

Inquiries are classified as “soft” or “hard” — the former doesn’t impact your credit score, while the latter does. A hard inquiry to your credit report can reduce your score by two to 10 points. This drop can be significant if you have a lower score to begin with. The impacts are less noticeable if you have a high score before the credit inquiry.

Luckily, you can improve your credit score over time — it’s not a fixed number. So, if your credit score isn’t where you want it to be, there are various ways to improve it.

Need a little background on credit topics? Review our posts that outline what a good credit score is or learn how to start building credit.  

And, remember, with the Spruce mobile banking app, you can monitor your credit score for free!

How does buying a car affect your credit? Other considerations…

When first getting an auto loan you may initially see a negative impact to your credit score because of the hard credit inquiry and new debt. The new loan may also impact a specific factor related to your credit score called length of credit history. This factor accounts for 15% of your FICO® Score .

To better understand this concept, let’s look at an example. If you had a credit card account that you opened 10 years ago and a second credit card that you opened six years ago, the average age of your credit accounts would be eight years. By getting a car loan, you’ll have a new account that will reduce the average age of your credit history.

Why does the length of credit history matter? Credit history shows your ability to pay back your debts. The longer your credit payment history, the more experience you have with credit – so it’s proof to lenders that you’ve got a favorable track record. 

If you’re financing through a car dealership, they typically pass along your information to multiple financial institutions. Each lender in turn may pull your credit report to check your eligibility for the car loan.

You might also shop around on your own for auto loan options with different financial institutions, like a credit union or bank, to get the most favorable interest rate in the market. In doing so, the financial institutions may also make a hard inquiry into your credit report.

Multiple credit pulls in a short time frame can hurt your credit score. However, since all auto loan inquiries are for the same reason, if they occur within a short period (try to stay within 14 days), there should be less impact to your credit score because they will likely get counted as a single inquiry.

Here’s the best news: A car loan can positively affect your credit! If you make your car payments on time, an auto loan could improve your credit score over time. Payment history is the biggest factor used to determine FICO® Scores and accounts for 35% of your credit score. A car loan could also improve your credit mix — having different types of credit accounts is another factor used when your credit score is calculated. 

Buying a car is a big purchase, so kudos to you for researching the impacts on your personal finances! Before buying, you should also consider the car’s make, model, and age and think carefully about what down payment and subsequent monthly payment you can afford relative to your income.

Watching your credit? Saving for a car? Here’s how Spruce can help

For a handy app that can help you save money and more, check out Spruce’s saving goals to help set aside money for savings with ease. You can also lean on Spruce’s credit tool^{Disclaimer number5. Go to disclaimer for more details.} to track your FICO® Score over time (without impacting your credit score). So, even if you have bad credit, you can learn ways to improve it over time.

Plus, with features like saving goals, overdraft protection^{Disclaimer number6. Go to disclaimer for more details.}, and cash back rewards^{Disclaimer number1. Go to disclaimer for more details.}, Spruce can help you be well on your way to getting better with money day by day.

Find out more about all the features Spruce has to offer. 

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This information provided for general educational purposes only. It is not intended as specific financial planning advice as everyone’s financial situation is different.