When you apply for and get approved for a car loan, it generally causes your credit score to take a slight dip. However, it’s only temporary as when you make your payments on time, your credit score tends to recover quickly. Therefore, it’s important to understand there’s no reason to worry about the temporary drop in your credit score when you are approved for a car loan.
How A Car Loan Application Impacts Your Credit Score
When a lender runs a credit check to see if you qualify for a car loan, a hard inquiry is generated on your credit report. Every time you have a hard inquiry, it can reduce your credit score and it stays on your credit report for 5 years. For people with “good” or “excellent” credit scores, this won’t make too much of a difference. However, if your credit score is between “fair” and “bad”, the enquiries can have a negative impact. If you have several hard inquiries on your credit report, it can drop your credit score and put you in a lower tier where you may have to pay higher interest rates.
When you check your own credit score or credit report, this is called a soft inquiry. These are only seen by you when you pull a copy of your credit report and don’t have a negative impact on your credit score.
Car Loans Can Improve Your Credit Score
The hit on your credit score caused by easy car loans is only temporary and soon vanishes. But the positive effects of paying your car loan repayments on time lasts for as long as you are continuing to make on-time payments. Lenders like to see you are able to manage your other loans or credit in a responsible manner when they are considering you for a loan.
Three Common Types Of Credit Accounts
There are three common types of credit accounts, they are revolving accounts, lines of credit from home equity loans and installment loans. Revolving credit is mostly focused on credit cards while lines of credit will allow you a credit limit and payments are to be made monthly. Installment loans include mortgages, personal loans or car loans where you must make equal installments payments until it is paid off.