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Will a Car Payment Affect My Credit Score?

Car Payments Johnson City TN

Will a Car Payment Affect My Credit Score?

While public transport is a great way to get around, there are many conveniences and advantages of owning a car. However, none of these conveniences are free. Considering the ever-increasing car prices, most people resort to car loans for a quick car purchase. You might wonder how a car loan can affect your credit score. We have a few answers.  

How Do Car Payments Affect Your Credit Score?

There are a lot of ways paying off your loan can affect your credit. A car loan repayment can either improve, decrease, or have no effect on your credit score. Generally, car loans lower your credit utilization. This improves your credit score before you make your initial payments. Once you start making payments, your credit utilization increases, which will lower your credit score. This continues until you pay off the loan completely or the loan balance is less than or equal to 30% of your original loan amount.

Credit scores do not solely depend on car repayments alone. They also consider other debts you may owe, any other loans you have borrowed, maxed out credit cards, and you making other inquiries within a period of two years. Leasing or purchasing a vehicle may also increase your revolving balance that lowers your credit score.

How Can You Prepare To Offset The Effects?

Plan Ahead

Advance planning is always a safe option. Consider your current financial commitments and determine if you’re able to pay back your loan. You may want to pay off your existing debts before taking out a loan. Do not make large purchases right after you start your payment cycle. Making too many credit inquiries in a short amount of time won’t look good on your credit score. If your credit rating is low, you will probably be offered a larger APR percentage. With average financing periods stretching up to 72 months, APR changes can make a huge difference.

Make Diligent Payments

You can offset the negative effects of a new loan by making timely payments. Prompt payments help boost your credit scores. If you pay off your loan quickly, you won’t have as many chances to improve your credit score. Is your credit score based on rolling credit lines? If yes, car loans may actually assist you in the long run. Having a diverse credit portfolio will not only boost your credit, but also establish your reliability. It demonstrates that you are reliable no matter what type of loan you take out. However, this only improves your score when you make your payments on time.

How Lenders Interpret Credit Scores

Lenders prefer credit scores between 720 and 760. If your score is in this range, you won’t have much trouble finding the best car loans. However, every lender is different, and each might have a different score preference.

Securing a car loan is all about credit scores and timely payments. Paying off a car loan can either improve or lower your credit scores. It depends on your personal financial position and your strategy for making prompt payments.

 

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