Do Car Loan Payments Improve Credit Score?
Do Car Loan Payments Improve Credit Score?
Posted on June 2, 2021
It’s popular question time again and this time it’s a regular in our inbox. Namely, do car loan payments help improve your credit score? We tasked our Flamborough auto loan team to answer.
Here’s what they said.
Do Flamborough car loan payments help credit?
Yes, they do! Every time you make a payment on time, it is noted in the payment history part of your credit report. The more payments you make on time, the more of an impact it has.
It won’t revolutionize your credit score but it incrementally improves it.
The main benefit of auto loan payments is in your payment history but it also has a modest influence on your credit mix and your credit utilization.
Credit mix
Credit mix is how many different types of credit you use. For some reason, having a wider range of credit like credit cards, auto loans, mortgages and other loans can help your credit score.
Within reason of course, because credit utilization.
Credit utilization
Credit utilization is how much of the available credit you have is in use. The lower the better.
For example, if you have five credit cards with a total of $20,000 as the credit limit but only had $200 outstanding, your credit utilization for those cards would be 1%.
On the other hand, if you have maxed out all those cards, your credit utilization would be 100%.
While there is no set ideal, most lenders like you to be no more than 30% utilization.
Auto loans are figured into credit utilization in a minor way but not as much as credit cards. If you have an auto loan, this would go towards that 30% so bear this in mind.
Would paying off the auto loan early also improve your credit score?
Not necessarily. Paying loans off early benefits you financially but won’t improve your credit score unless you’re over that 30% credit utilization figure.
In most other circumstances, your credit score might actually take a hit.
You will reduce your credit mix and you will no longer have the benefit of those regular payments in your payment history. So, while it works for you on a financial level, don’t pay it off early thinking it will benefit your credit score, because it won’t.
How much does missing an auto loan payment hurt a credit score?
It’s impossible to put an exact number on how much your credit score will be hit after a missed payment because there are so many variables.
Plus, the two credit agencies don’t really advertise how much your score is hurt.
If you miss a payment but pay within 28 days, your credit score may not be hurt at all. As long as you contact the lender, pay the amount and explain why, they may not even make the missed payment entry.
Missed payments longer than 28 days that are reported will hit your credit score. You can expect a minimum of 100 point hit from our experience but that figure can differ a lot depending on your score and the circumstances.
Contact Unique Chrysler for help, advice and competitive Flamborough car finance and leasing.
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