Credit scores can crumble to the ground seemingly overnight, yet they take months to build back up after a fall. So, what should you do when you need to raise your credit or FICO score significantly—and quickly?
Aside from having a home mortgage, the fastest way to improve your credit is to finance a car and pay off the auto loan responsibly. Although your score won’t skyrocket right away, those small, incremental increases will rebuild your credit eventually. (Hey, Rome wasn’t built in a day.)
What Goes Down…
First: The bad news.
When you officially apply for a vehicle loan, your credit score will be lowered. This is caused by the dealership or lender checking your history, which places a “hard inquiry” on your credit report. When you simply apply for a loan, the average credit recovery time is about 3 months. (Refinancing vehicles does the same to credit scores.)
Once you are approved for and accept the loan on your new vehicle, your credit score will go down a bit more. This is due to new debt being added to your credit report, and no history of payments tied to that new debt (yet).
…Must Come Up
But there’s some good fortune waiting for you at the other end.
Because you are approved for an auto loan, you have a new entry on your credit history, which has a positive impact on your overall score. This account, often called an “installment account,” likely wipes out the initial “hard inquiry” hit your credit report took. Additionally, having an inquiry is a signal that you’re using your credit as intended.
Another bonus to inquiries is that they are often bundled into one. When shopping for car loans, having several inquiries within a short time will not be separated. Instead, your report will count them all as one when your FICO score is calculated.
With each on-time payment on your auto loan, your credit score will inevitably rise as lenders report to the three credit agencies. Of course, for you to rebuild your credit, it’s important to consistently pay your loans on time and according to your financing agreement, as your payment history accounts for up to 35% of your total credit score. Otherwise, all your efforts will be for naught as one missed payment can take up to 18 months to recover from.
What should I be looking for when applying for auto financing to help my credit score?
For a “slow and steady” approach, we suggest going with the longest term possible, with the lowest monthly payment possible. You’ll likely have a high-interest rate, but you can refinance your auto loan down the line. Just be sure to utilize an online payment calculator to visualize what your monthly finances will look like.
If you really need to increase your credit score fast, you may want to take the approach above and double your auto loan payment each month. If you take this approach, you’ll want your remittance to indicate what the extra money will pay for: principal. Contact your lender when you send each payment, as well, to ensure they report to the credit bureaus promptly.
How long does it take for car loan payments to improve or build credit?
There’s no way to know how much better your credit will be, or when your score will become normal again, once you begin making car payments. However, after you acquire car financing, expect your on-time payments to increase your damaged credit score slowly. If you have particularly bad credit, that score will increase drastically after making approximately 9 on-time loan payments. And if you’re new to the credit game, establishing your FICO score may only take a few weeks or months of timely payments.
What can I do to repair my credit after missing a car loan payment?
It’s common for lenders to practice patience when it comes to reporting late payments; some may not report your late payment until it’s in the NET-30 range—or after 30 days of delinquency. (This is not a hard and fast rule, mind you.) So, if you miss your payment or are late, communicate with your lender to ensure they don’t report negatively to the credit bureaus. Late payments can stay on your credit report for up to 7 years!
Will paying my entire vehicle loan early hurt my credit?
Unless you have a very diverse credit report, having an installment account like your vehicle loan is good for your credit. Paying it off early could decrease your “credit mix,” which would ultimately decrease your credit score. However, your particular situation may benefit from early pay-offs.
Should I refinance an old car loan to help my FICO score?
As your credit slowly improves, consider refinancing and securing a lower APR. A refinanced car loan can save you money in interest payments and allow you to further rebuild your credit. Need help financing a new car or refinancing your auto loan in Kansas City? Swing into your local McCarthy car dealer to discuss your options and apply for vehicle financing.