Understanding the impact of car loans on your credit score

Your credit score is an important factor that all lenders use to decide if they are prepared to lend to you.

A credit score is a three-digit number that reflects your creditworthiness based on your financial history and behaviour. It acts as a financial report card, summarising how you manage your credit and debt. 

Lenders, such as banks and financial institutions, rely on your credit score to assess the risk associated with lending you money. 

Your credit score impacts things like whether or not your loan is approved, the interest rate that you will have to pay and if you get approved for other things like rental applications or even employment opportunities.

Whenever you apply for credit of any kind, your credit score will be impacted. This is certainly going to be the case when applying for a car loan. Here’s how a car loan can impact you.

Hard credit inquiries

When you apply for a car loan, the lender will conduct a hard credit inquiry, also known as a hard pull. This inquiry is a standard procedure in loan applications. While a single hard inquiry has minimal impact on your credit score, multiple inquiries within a short period can raise concerns from lenders. It may indicate that you're seeking additional credit, potentially making you appear riskier to lenders. It’s important to know your chances of success before applying which is where a finance broker can really help.

Adding a new credit account

Successfully obtaining a car loan adds a new credit account to your credit history. This can have both positive and negative implications. On one hand, it diversifies your credit mix, which can look good to lenders. On the other hand, a new account may temporarily lower the average age of your credit history, potentially impacting your credit score. However, this is often short-lived and responsible management of the new account can help improve your creditworthiness over time.

On-time payments

Consistently making on-time payments on your car loan is crucial for maintaining or improving your credit score. Timely payments demonstrate responsible financial behaviour and can positively impact your credit history.

Payment history

Your payment history, including any late or missed payments on your car loan, significantly impacts your credit score. It's vital that you meet your payment obligations to avoid negative marks on your credit report.

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