Every time you buy something on credit, there’s a chance your purchase will raise or lower your credit score. This includes cars. But how does buying a new (or new-to-you) car affect your credit score? A lot of that depends on you.
How Credit Works
In case you’re new to buying stuff on credit, or you need a bit of a refresher, your credit score is basically a way of telling potential lenders how much of a risk you might be when borrowing money.
There are six main things that credit bureaus consider when coming up with your credit score:
- Your payment history (especially whether you make your minimum debt payments on time)
- How much debt you currently have
- How long you’ve had your debt with each account
- The kinds of debt you have
- The number of credit inquiries you’ve had
- Judgments on public record (bankruptcies, tax liens, etc.)
A score of about 700 to 800 is generally considered good or low-risk. A score of 800 or higher is excellent. Most people fall somewhere in the 600 to 700 range, which is considered fair.
So, What Happens When You Buy a Car?
If you plan to lease or finance your vehicle, you’ll have to apply for credit, typically at the dealership or through a bank. When this happens, your potential lender will check your credit score. These credit checks are sometimes called “hard inquiries,” which get included on your credit report—even if you don’t end up taking out the loan.
An occasional hard inquiry will likely not make a significant impact on your overall credit score. But be warned: Too many hard inquiries over a short period of time may lower your credit score.
If you decide to take out a loan to buy a car, the new debt will be added to your credit report. You may even notice an initial drop to your score until you start making regular payments. As long as you make your minimum payment on time each month, you’ll establish a good payment history, and your score will likely increase. Do that for long enough, and your vehicle purchase may end up being an overall positive item on your credit report, rather than a negative.
Before You Buy …
Before buying a new or used car, there are a few things you should take into consideration.
First of all, if you have a lower credit score, that doesn’t necessarily mean you can’t buy a car or get insurance for it. However, a lower credit score will most likely mean a higher interest rate on your auto loan. In other words, you may end up paying more money over the life of your loan, maybe even thousands of dollars more.
In addition, having a car loan on your credit report may affect your ability to buy other big-ticket items with credit, especially things like a house. If you plan on buying a home in the near future, you might want to wait to purchase that new or used automobile until after you’re able to secure a mortgage. If you need a car sooner than you need a house, however, that’s OK. Just make sure you can establish a solid payment history on your car loan first. A history of late or less-than-minimum payments on your car may make some mortgage lenders think twice.
Lastly, keep in mind that some auto insurance companies may check your credit score as part of determining your insurance rate. Getting your credit in better shape before you buy a car may help you get a more affordable quote on your auto insurance premiums.