Car loans are pretty popular. Many Americans have them and get them all of the time. You are thinking of getting a car loan to get that car you want, but you’re also concerned about how this might affect your credit score. The following will help shine a light on how this action might affect your score.
Debt Load Change
One thing that affects your credit report is your debt load. Having a debt load isn’t necessarily a bad thing. Lenders want to see that you can manage these outstanding debts, so that’s not a problem, but this change will register on your report.
When you take out the car loan, you’re likely going to see a drop in your score, so keep that in mind. There’s nothing you can do about this drop, but things should stabilize by the time you pay your first installment. Since you know the score might drop, be sure to not apply for anything until your score goes back to normal.
Diversification Improvement
It’s easy to get stuck with one type of loan or credit. People get one credit card and are sometimes afraid to branch out to other types of loans. The problem with this is that lenders like when you have a variety of debts, but they have to be different. Having several credit cards isn’t seen as diversification on your report.
When you get this loan, you’ll be changing things up a bit, and that’s a good thing. Yes, your score might drop when you first get the loan, but if you’re able to manage it, then having it might end up boosting your score. You won’t see the boost immediately. You probably have to pay it for a while before you see a change, but it’s coming, just be patient.
Paying it Off Early Plan
Folks pay attention to the interest rate. Each rate is different, so hopefully, you get a good one, but the amount you pay for the loan can add up. Once you start paying attention to it, you might get that urge to pay off the loan quickly. You’ll avoid the interest and won’t have to worry about this payment anymore. The plan makes sense, but before you enact it, consider a few things.
For example, if you want to have a healthy score, you’ll want to keep the loan. The reality is a long credit history looks good on your record and can improve your score. On top of that, sometimes, car loan contracts may say you can’t pay the loan early or you’ll have to pay a penalty. Find out if you have to worry about this before you make a decision.
Check the Credit
If you’re going to be taking out a car loan and want to track how it affects your credit, you’ll have to do this yourself. You’re going to have to check your credit report. You are entitled to one free check every year, but it doesn’t hurt to check a few more times in one year. You might like hearing that every time you check, it counts as a soft inquiry against your report.
This sounds a little scary but don’t worry. A soft inquiry won’t count against your credit, so there is no need to stress about this. As a side note, you should consider making a habit out of checking your report every so often to make sure there’s nothing suspicious going on. Credit fraud does happen, and if you check your report enough, you’ll catch it early.
Now, you know how getting a car loan is going to affect your score. For the most part, you should be more than okay as long as you pay your bill on time every time it’s due. Consider working with a financial advisor to help you budget this new loan and make sure you stay on top of it.
