How a car loan affects your credit score

If you’re in the market for a new set of wheels and you’re looking to buy them with a loan, you might be wondering – does a car loan affect your credit score? It’s certainly something worth considering when taking out any kind of credit product.

The reality is that all types of finance have the potential to affect your credit score, both positively and negatively, and at different stages of the borrowing process.

To get a better understanding of how a car loan could affect your credit score, it’s helpful to know how credit scores are calculated.

When determining your credit score, Australia’s major credit reporting bureaus, such as Equifax, take a range of factors into consideration, including:

• The number of credit accounts you have, and their maximum limit
• Existing loans you may have
• Your current and past debt, including your repayment history and any late payments
• Any default judgements or a bankruptcy record against your name (if applicable)

Will getting a car loan help my credit score?

Since the introduction of comprehensive credit reporting, credit providers are required to report positive credit events in addition to negative ones.

This means that your car loan could indeed help your credit score if you use the opportunity to consistently demonstrate responsible credit behaviours.

By regularly making your car loan repayments on time and putting in a concerted effort to avoid late payments, your repayment history could benefit your credit score.

Could getting a car loan hurt my credit score?

On the other hand, there are a few ways a car loan could potentially hurt your credit score, including the following scenarios:

Submitting multiple car loan applications:

Each time you apply for credit, the loan provider will run a credit check which is recorded on your credit file as a hard enquiry. If you submit multiple car loan applications at once, or in close succession, you could risk damaging your credit score.

Missing payments:

Forgetting to make your car loan repayments, or paying them after the due date has passed, could be detrimental to your credit score. Generally, the longer overdue the payment, the more serious the event will likely be considered, and the bigger impact it could have on your credit score.

What credit score is needed to get a car loan?

Credit providers typically determine car loan interest rates by credit score. Excellent credit borrowers will often be eligible for the most competitive interest rates, while average or poor credit borrowers tend to be offered higher interest rates.

There isn’t a specific credit score that will guarantee approval for a car loan, but it tends to be the case that the higher your credit score, the more desirable you may be as a customer to lenders.

So, while a car loan has the potential to both positively and negatively affect your credit score, doing your due diligence and managing your credit responsibly can give you the tools you need to protect it as best you can.