Does Applying for a Car Loan Hurt Your Credit Score?
07 January, 2025
Synopsis
- Applying for a Car Loans can affect your credit score
- Buying a car can help you improve your credit score
- Timely payments and low credit utilisation may help you build a good credit profile
Your credit score is one of the important indicators of your financial health. It can affect your ability to secure loans as well as how much interest you pay. A new loan, including a Car Loan, may impact your credit score. In this article, you can explore how a Car Loan can affect your credit score, the factors involved and strategies to maintain a healthy credit score while managing a Car Loan.
What Factors Impact Credit Scores?
Before understanding how a Car Loan impacts your credit score, it’s essential to understand what a credit score is and how it is calculated. A credit score indicates your creditworthiness in a numerical format, typically ranging from 300 to 900. Your Credit Card and Loan details are shared with credit information companies that compute the score. The score is calculated based on several factors:
Payment History: This is the most significant factor and looks at whether you've paid your bills on time. Missing one payment deadline can also impact the score badly. Late or default payments are reported to credit bureaus and can remain on your credit report for several years.
Credit Utilisation: This is the total amount you owe. It is the amount of credit you are using compared to the total credit limit. For instance, if you have a credit card limit of ₹1,00,000 and your outstanding balance is ₹40,000, your credit utilisation ratio is 40%. A lower credit utilisation ratio is generally better for your credit score, indicating that you are not overly reliant on credit.
Length of Credit History: This factor considers how long your credit accounts have been open. You can check your oldest account in your credit report. A lengthy credit history shows lenders that you have experience managing credit over time. The average age of all your accounts is also considered, so having an older account may improve your score.
Credit Mix: Credit mix means a variety of credit accounts, including Credit Cards and loans.
New Credit: Any new credit you take, including Credit Cards and Loans, can impact your credit score tentatively.
How Much Does Your Credit Score get Affected After Buying a Car?
How a Car Loan affects credit history totally depends on how well you manage things. Timely repayment holds the key to rebuilding your score.
How Car Loans Influence Credit Scores
A Car Loan, like any other type of loan, can significantly impact your credit score in several ways:
- Initial Impact from a Hard Inquiry
When you apply for any loan, the lender will perform a credit check. This credit check is known as a "hard inquiry" and it can temporarily lower your credit score. However, this drop is usually minor and short-lived. If you apply for multiple Car Loans across lenders, it can lead to multiple hard inquiries. - Adding a New Credit Account
Once you are approved for a Car Loan, it will show up on your credit report as a new credit account. Adding a new loan can reduce the average age of your credit accounts, which can slightly lower your score. However, this effect diminishes over time as the loan account ages. Alternatively, if you don't have many loans or types of credit, a Car Loan may help improve your score by adding variety to your credit mix. - Effect of Payment History
Payment history is the most critical factor in determining your credit score. Making on-time payments on your Car Loan can generally have a positive impact on your credit score over time. Conversely, late payments can significantly harm your score. Even a single missed payment can drop your score substantially and remain on your credit report for a long time. - Paying Off the Loan
Paying off a Car Loan can have mixed effects on your credit score. While it eliminates the debt, it may also reduce the diversity of your credit mix. Moreover, it may lower your average account age, which might cause a small dip in your credit score.
How To Manage Your Credit Score During Your Car Loan Tenure?
Make Timely Payments
Always make your Car Loan payments on time. Consider setting up reminders to ensure you have sufficient balance in your account from where the Car Loan EMI is deducted. Consistent and on-time payments will strengthen your payment history.
Avoid Late Payments
Late payments can severely impact your credit score and remain on your credit report for several years. Plus, you will be charged a late payment fee. If you anticipate difficulty making a payment, contact your lender in advance to discuss potential options, such as a temporary payment deferral.
Monitor Your Credit Report Regularly
Regularly check your credit report to ensure that your Car Loan and other accounts are accurately reported. Look for any discrepancies or errors, such as incorrect payment history or duplicate accounts, and dispute them promptly with the credit bureaus.
Does Transferring a Car Loan Affect Credit Score?
You can transfer your Car Loan to another bank if needed. However, this may impact your credit score. When you transfer a Car Loan, the new lender will most likely perform a hard inquiry on your credit report, which may temporarily lower your score. However, if the transfer results in better loan terms and you continue to make timely payments, it can ultimately have a positive effect on your credit score by demonstrating responsible debt management.
How Long Does it Take to Update Credit Score?
It typically takes about 45 days for your credit score to update after any changes are made to your credit report. Credit bureaus receive updates from lenders and creditors multiple times a month. Any new information, such as payments, Credit Card balances or loan applications may be reflected in your credit score. The exact timing can vary depending on when your creditor reports the information to the bureaus and how quickly the bureau processes it.
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*Disclaimer: Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Credit at sole discretion of HDFC Bank Ltd. Other charges and taxes as applicable. The offer is unconditionally cancelable without prior notice. Interest rates are subject to change. Please check with your RM or closest bank branch for current interest rates.
