How Much Does Your Credit Score Drop When You Buy a Car?

How Much Does Your Credit Score Drop When You Buy a Car?

If you’re like most Americans, you want to ensure that you have the best possible credit score. That said, if you’re planning on purchasing a vehicle and financing it, you might be wondering how much does your credit score drop when you buy a car? When you buy a car, your credit score may initially drop anywhere from 10 points to 50 points. The number of points your credit score will drop when you buy a car depends on the number of banks your dealership shopped at to get you financing for your new car. For example, if the dealership shops around at five banks to secure financing for you, you may see five new inquiries on your credit report, which will lower your credit score. Also, when a new loan account shows up on your credit report, it increases the amount of debt that you have, which may lower your credit score, as well.

Why Does Your Credit Score Drop When You Buy a Car?

If you buy a car and you finance your car, your credit score may drop for a variety of reasons. The main reason your credit score drops when you buy a car is that the dealership you bought your car from may have shopped for financing at several banks to obtain the best interest rate for you.

It’s not uncommon for dealerships to approach up to five banks to obtain the best financing rates for you. Every bank or lender that your dealership approaches will place a hard inquiry, commonly known as a hard pull, on your credit report. Every hard inquiry that’s added to your credit report can cause a drop in your credit score that ranges from 5 to 10 points.

So, the more hard inquiries you rack up, the bigger the drop in your credit score. Hard inquiries will stay on your credit report for up to two years. After the two-year period, they will be removed from your credit report and will no longer impact your credit score.

The second reason your credit score may drop when you buy a car is that the auto loan that you took out cause an increase in the total debt that you have. Oftentimes, increasing the amount of debt that you have causes your credit score to drop. This is so because the “amounts you owe” has a 30% impact on your credit score, so adding a considerable amount of debt can cause a decrease in your credit score.

That said, although you may notice an initial drop in your credit score, making timely payments on your auto loan will increase your credit score as the account ages. So, if your credit score dropped because you bought a car, make timely payments and your timely payments will ultimately increase your credit score.

The third reason why your credit score drops when you buy a car is that opening a new loan account decreases the average age of accounts that you have. The average age of your accounts, accounts for 15% of your credit score. So, opening a new account decreases the average age of your accounts, which causes a drop in your credit score. As time passes from the date you opened your auto loan account, your average account age will increase, bringing up your credit score.

Credit Score Planet Note: Although buying and financing a car can cause your credit score to drop initially, making timely payments on your loan will ultimately increase your credit score even beyond what it was before you applied for the auto loan.

How Can You Keep Your Credit Score from Dropping When You Buy a Car?

You can keep your credit score from dropping when you buy a car by researching the best auto loans before going to a car dealership and choosing one lender with which to finance your vehicle. Apply for financing with one lender in advance and then go to the dealership with an approved auto loan. This is beneficial for two main reasons. The first reason this is beneficial because it prevents the dealership from shopping for financing with multiple banks, helping you avoid multiple inquiries. The second reason this is beneficial is because you can focus on negotiating the pricing of the vehicle without focusing on the loan for too long. Avoiding too many inquiries is great because, as mentioned previously, each inquiry that’s placed on your credit report remains on your account for two years. So, avoiding them all together is the best thing you can do to avoid your credit score from dropping due to too many inquiries being placed on your credit report.

Everything taken into consideration, if you take out an auto loan to purchase a vehicle, make all your payments on time and you should ultimately see an increase in your credit score, especially after you pay down the balance on your loan.

Credit Score Planet Frequently Asked Questions

1) Will my credit score drop if I buy a car?

If you’re financing a car or leasing it, initially taking out a loan or opening a lease account will cause your credit score to initially drop. However, if you make timely payments on your loan account, you can expect your credit score to go back up, possibly even beyond what it was prior to applying for financing.

2) Will a car loan raise my credit score?

If you take out a car loan and you make all your payments on time, you should expect your credit score to increase. However, if you miss any payments, your credit score will take a huge hit.

3) How does buying a car affect your credit score?

If you buy a car with cash, it will have no impact on your credit score. However, if you lease or finance your car, your credit score will drop initially. After a few months of making payments and paying down the balance on your auto loan, you will notice an increase in your credit score.

4) How does a car loan affect your credit?

Initially, a car loan will cause a drop in your credit score because of the hard inquiries that were placed on your credit report, as well as the increase in your account balance. However, after a few months of making on-time payments, you will notice your credit score begins to improve.

Credit Score Drop After Buying a Car

We know that not everyone has the cash to buy a car free and clear, so if you’re like most of us, you probably took out an auto loan to purchase your car. Taking out a loan to buy a car often causes your credit score to drop. You should know that the drop in your credit score is temporary. Some people have reported their credit score decreasing by as much as 50 points after obtaining an auto loan. The reason for this drop is that your dealership may have shopped at too many banks to obtain financing for you, and the second reason is that obtaining an auto loan increases your account balance, which negatively impacts your credit score. That said, if you make timely payments on your auto loan, your credit score will increase, possibly even beyond the credit score you started off with prior to buying your car.