Will a Car Payment Affect My Credit Score?

Will a Car Payment Affect My Credit Score? 

Credit scores are complex and calculated by considering a number of factors and conditions. In order to maintain a good credit score, you need to open and keep credit on your account while staying current on all your credit payments.

Credit can take the form of credit cards, personal loans, home loans, mortgages, car loans, education loans, etc. Each of these contributes to forming your credit mix. In fact, staying current on your bill payments are also accounted to your credit mix.

Your credit score is calculated by FICO (Fair Isaac Corporation) which is the global leader in credit scoring services. Five factors are taken into account when calculating your score.

Payment History

This makes up 35 percent of your credit score. Payment history is of all your payments and whether you’ve made each one on time and in full. Even a single default or incomplete payment will go on your credit record and stay there for seven long years. So, if you miss a payment you’ll not only lose points but also have it on record long after you’ve made up the lost credit points.

And yes, you can recover lost credit points by continuing to make payments on your car loan and all other monthly payments on time and to the full.

Credit Utilization

This pertains to your credit cards and not to your car loan. So just know that the lower this value, the better for your credit score. This accounts for 30 percent of FICO’s calculation of your credit score.

Length of Credit History

Loans including vehicle loans and credit cards are considered in your credit history. The longer and more up to date you are on all of them, the better your score. So keep in mind that if you wish to close out your car loan early, it may improve your credit score a bit when you do so, but then your score will become somewhat stagnant since your payment history factor is cut down. This accounts for 15 percent of FICO’s calculation of credit score.

New Credit

When you take up a new car loan for the first time, this accounts for new credit and can contribute positively toward building your credit score. New credit makes up 10 percent of your score.

Credit Mix

Having different forms of credit and managing your finances well enough that you can pay off all your monthly dues, gives you the edge when it comes to calculating your credit score. Credit mix makes up 10 percent of your credit score.

Since your monthly car payments are valued so highly by FICO, it’s a good idea to make sure that you calculate beforehand, how much and how many (if you already have a loan) monthly payments — including your credit card balances — you are able to pay. If you find yourself in a tough spot even though you’d done your homework at the time of applying for a vehicle loan, you can always look into various options that experts offer on how to avoid defaulting on your monthly car payment.