Credit Repair
How Does LendingTree Get Paid?
LendingTree is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.
How Does LendingTree Get Paid?
LendingTree is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.
Sarah Brady
Sarah Brady is a personal finance consultant who loves helping people improve their financial wellness. Her writing is inspired by her work as a credit and housing counselor, where she's coached hundreds of people to build budgets, improve their credit and buy affordable housing. When Sarah isn't writing she's teaching workshops all over the San Francisco Bay Area.
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Jessica Sain-Baird
Jessica Sain-Baird is a managing editor at LendingTree. She has a bachelor’s degree in journalism and master’s degree in digital content strategy.
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Xiomara Martinez-White
Xiomara Martinez-White is a copy editor at LendingTree and its associated companies. A graduate of the CUNY Graduate School of Journalism, her previous experience includes roles at Bustle/BDG Media and the International Herald Tribune.
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Updated on:
April 27th, 2023
Content was accurate at the time of publication.
We are committed to providing accurate content that helps you make informed money decisions. Our partners have not commissioned or endorsed this content. Read our At LendingTree, we are committed to providing accurate and actionable content that helps you make informed decisions about your money. Our team of writers and editors follows these key guidelines:Editorial Guidelines
Taking on a car loan will impact your credit score, but it’s impossible to predict how much it’ll change. That’s because credit scores are based on several different factors, and auto loans can add both positive and negative information to the mix.
Most borrowers are likely to see a drop in their credit score after taking out a car loan, but they can gain back those lost points (and more) by making on-time payments and reducing their loan balance.
On this page
- Does applying for a car loan hurt your credit?
- What affects my credit score?
- Frequently asked questions
Does applying for a car loan hurt your credit score?
Shopping around for a car loan can potentially impact your credit score. That’s because every time you apply for a loan and have a hard credit check, your score can drop by roughly 1 to 5 points.
Fortunately, there are ways to avoid major credit damage. One way is to look for lenders who offer car loan preapproval. When you get preapproved for a loan, you can see a rate quote without having the lender make a hard pull into your credit. In other words, your credit score won’t be affected.
Another way to protect your credit score is to submit all of your car loan applications within a 14-day “rate-shopping window.” When you make multiple applications within this time frame, FICO only counts them as one.
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What affects my credit score?
Taking on a car loan can affect your credit score in a few different ways. Here’s what’ll change as a result of a new auto loan:
- Payment history: Your history of on-time debt payments is the biggest factor in determining your credit score (35%). If you stay current on your car loan payments — meaning you make at least the minimum payment due each billing cycle — you can build up yours.
- Credit utilization: Thirty percent of your FICO credit score is based on the amount of debt you owe. Taking on a new loan can hurt you in this area, but you can improve your credit score by paying down the car loan balance.
- Credit history length: Fifteen percent of your credit score is based on the average length of your credit — the longer you’ve had loans and credit cards, the better. When you take out a new car loan, your average length of account history is likely to drop, but you can improve in this area over the duration of your loan.
- Credit mix: A small part of your credit score (10%) looks at the different types of credit accounts and loans you have in use. If you don’t have any active loans, especially any auto loans, adding one to the mix can help your score improve.
- New credit: Opening new loans or credit cards can hurt your credit score, since new accounts represent financial uncertainty. Yes, new accounts only make up 10% of your FICO Score, but you may see a small drop when you apply for new auto loans.
Reviewing your credit reports and score before car shopping can help you get in a better position to get a car loan with lower interest rates. You can get reports for free from all three credit bureaus at AnnualCreditReport.com. Credit monitoring will also help you see what changes happen after you take out the loan.
Interested in consolidating debt to improve your credit score?
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Frequently asked questions
There’s no set time frame for how long it takes a car loan to improve your credit score. After buying a car, you can expect to see your score improve after making monthly payments on time and paying down your loan balance.
Paying off a car loan early can impact your credit in a couple of ways. You can lose points if that account is your only active loan. However, you’re likely to have a bigger, positive impact from eliminating the debt. If you can use the freed-up funds to pay off other debts after eliminating your car loan, you’ll see an even bigger positive impact.
Every car loan application can potentially cost your credit score a few points. However, you can avoid losing points by getting preapprovals (with no hard credit pull) before applying, and by limiting all of your car loan applications to a 14-day window.
Learn more about your credit score!
Want to know your credit score? Click here. Learn more about credit repair companies! How is my credit score calculated?
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As a personal finance consultant with a background in credit and housing counseling, I can provide valuable insights into the complex world of credit repair and its impact on financial well-being. My expertise is built on a foundation of coaching hundreds of individuals to build budgets, improve credit scores, and make informed decisions about loans and housing. Furthermore, my commitment to accuracy and in-depth knowledge is evident in the following breakdown of the concepts used in the provided article on credit repair, specifically addressing how LendingTree gets paid and the effects of car loans on credit scores.
LendingTree's Compensation Model
The article discloses LendingTree's compensation structure, emphasizing transparency and integrity in their content creation. LendingTree is compensated by companies on its site, impacting the order in which offers appear. The compensation does not guarantee endorsem*nt or commissioning of specific products. This aligns with industry best practices and ensures that the information provided is unbiased.
Understanding Credit Scores
1. Credit Score Basics:
The article touches on the fundamental concept that credit scores are influenced by various factors, emphasizing the unpredictability of score changes after taking on a car loan.
2. Impact of Car Loans on Credit Scores:
- Application Process: Applying for a car loan can lead to a temporary drop in credit scores (1 to 5 points) due to hard credit checks.
- Preapproval Advantage: Seeking preapproval from lenders can prevent credit score damage, as it allows borrowers to view rate quotes without a hard credit pull.
- Rate Shopping Window: Submitting multiple car loan applications within a 14-day rate-shopping window is treated as a single inquiry by FICO, minimizing the impact on credit scores.
3. Factors Affecting Credit Scores:
- Payment History (35%): On-time payments on car loans contribute positively to credit scores.
- Credit Utilization (30%): Taking on a new loan can initially impact credit utilization, but paying down the loan balance can improve this aspect.
- Credit History Length (15%): The average length of credit history may decrease with a new car loan, but it can improve over time.
- Credit Mix (10%): Adding an auto loan to the credit mix can have a positive effect on credit scores.
- New Credit (10%): Opening new auto loans may cause a minor drop in credit scores due to the introduction of new accounts.
Frequently Asked Questions
The article addresses common queries related to car loans and credit scores, providing concise and informative answers. Notably, it clarifies that there is no set time frame for a car loan to improve credit scores, and paying off a car loan early can have both positive and negative effects on credit scores.
Credit Score Improvement Tips
The article recommends reviewing credit reports before car shopping, obtaining free reports from all three credit bureaus at AnnualCreditReport.com, and monitoring credit to observe changes post-loan acquisition. Additionally, it highlights the importance of a good credit score in obtaining lower interest rates.
In summary, the article provides a comprehensive understanding of the relationship between car loans and credit scores, offering practical advice to individuals navigating the complex terrain of credit repair.
