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As you roll out of the car dealer’s parking lot in your brand new ride, you’re probably not thinking much about the auto loan you just signed or how it might affect your credit.
But if you’re not careful, a few small mistakes may make it difficult for you to secure other lines of credit.
How car loans affect credit
Getting a new car loan has two predictable effects on your credit:
It adds to your credit history, which has a positive impact, assuming you pay on time, every time.
If you pay as agreed, the credit score points you temporarily lose when you applied should be more than offset by the ones you gain from a history of on-time payments.
When you apply for a credit product that involves a hard inquiry on your credit, you may get an influx of marketing messages from lenders. This happens because credit bureaus sell marketing lists triggered by hard inquiries. But you can opt out, either permanently or for five years. Visit OptOutPreScreen, a service of credit bureaus Equifax, Experian, TransUnion and Innovis, or call 888-567-8688. The bureaus say your request will be effective within five days. Note that you may still receive marketing offers from lenders that use other sources. Opting out does not affect your credit score or your ability to apply for credit or insurance.
Auto loans on your credit report
Your auto loan will likely affect your credit report and your credit score.
When you first look at your credit reports, you may feel overwhelmed by the data. To see your car financing, turn to the page on reports provided by each of the three major credit bureaus — Experian, Equifax and TransUnion — that lists your car loan account and look at these two categories:
Type of accounts: An auto loan is typically reported as an installment account. Other types of installment accounts include mortgage loans and student loans. Those are payments of the same amount, made for a set number of payments. Because a portion of your credit score is derived from “credit mix,” getting a car loan may help your credit profile if you don’t already have an installment loan.
Current status: If you’re always on time with your car payments, your credit report will note that your car loan is “current” or “paid as agreed.” Because payment history has the biggest influence on scores, staying current on your payments could benefit your credit score significantly. Should you fall 30 or more days behind, you risk having your car repossessed by your lender and ruining your credit.
If you make all of your auto loan payments on time and your credit reports show that over time, great. But if an error pops up — for instance, an on-time payment is posted as late — consider filing a dispute.
Remember, you can get free copies of your credit reports every 12 months to make sure all your accounts are being reported correctly. You can check more often than that with NerdWallet’s free credit report, which updates weekly.
What to know about car loan shopping
Your application for auto financing will show up in one more place: credit inquiries. Inquiries made when you apply for credit can cost you points on your credit score. But if you group applications for car financing close together, they should count as just one.
While you’re shopping for the lowest auto loan rates, you may allow multiple lenders to run credit checks and end up with several hard inquiries listed on your credit report. That’s OK.
Generally speaking, if you’re shopping for an auto loan within a 30-day period, all those hard inquiries that are listed on your credit report will only count as one when your FICO score is calculated. The VantageScore has a 14-day rolling window for shopping. Play it safe and keep your search brief so that your credit score doesn’t take an unnecessary hit.