How Fast Will a Car Loan Raise My Credit Score? A Driver’s Guide

Did you know that in some situations taking out a loan can actually boost your credit score? 

Read on to learn more about how and when financing can improve your credit rating and get answers to burning questions like ‘how fast will a car loan raise my credit score’ and ‘is raising my credit with an auto loan worth it’. 

How Fast Will a Car Loan Raise My Credit Score?

It takes 30 to 90 days for information to get updated in your credit report, the FCAC says. So, in theory, if you take out a car loan and make regular payments, you should see small improvements in your credit rating in about three months. 

However, in practice, there isn’t a set timeline for how soon your credit score will improve since this mainly depends on your current credit rating. 

Namely, those who already have stellar credit, might not even notice small increases. But should your credit score leave something to be desired, you may start seeing some changes in about three to six months. If your credit score is very poor, it might take up to six years of consistent payments to turn your credit rating around.

What happens to your credit score when you apply for a car loan?

You should not expect to see a drastic improvement right after you get approved for a car loan. Actually, when you apply for a loan, the lender will request a copy of your credit report from Equifax or TransUnion, also known as a hard inquiry. This has a negative effect on your credit score and can stay on your file for up to three years. 

However, once you begin making payments on your loan, positive information will be marked on your credit report and you should start seeing an improvement.

How is Credit Score Calculated

To get an idea of how fast a car loan can help you build credit, you need to understand how credit is calculated.

Each credit bureau has its own criteria, but in general, these are the main factors involved.

Payment History

According to Equifax, payment history accounts for 35% of your credit score. 

A favourable history means that you’ve made your loan payments on time and have no collections accounts in your name. Your payment history also includes details on late or missed payments, such as how late the payments were, the amount owed, and how often you were late with making repayments on your loan. 

Therefore, if you want to improve your credit score with a car loan, it’s essential that you make all your monthly payments on time, without fail. 

Amounts Owed

Credit bureaus also look at the ratio between how much of your revolving credit you are spending vs how much available credit you have. This is also known as the credit utilization ratio and it makes up 30% of your credit score. 

However, since credit cards are rarely used for a major purchase such as a car, auto financing will not have much of an impact on this factor. You could mix credit though, i.e. have several types of credit accounts open—paying several debts off at the same time shows lenders you are financially responsible.

New Credit

As mentioned above, whenever you apply for financing (auto or otherwise), the lender will request a copy of your credit report which is logged in as negative information on your file and causes a slight dip in your score. Inquiries, though, only take up 10% of your overall credit score and are erased from your file in three years. In other words, having a hard pull on your credit record is not as bad for your rating as missing payments or filing for bankruptcy. 

Keep in mind that requests for pre-approval or getting a copy of your own report are known as soft inquiries and will not affect your credit score.

Credit History 

To determine the length of your credit history, the lender looks at the age of your oldest and newest account, along with the average age of all your accounts, while segmenting them into specific types. Plus, they will look at how long it’s been since you last used your accounts to determine how active they are. 

To build your credit score with a car loan you need to keep the account open for at least a year or for the entire duration of the loan if possible, TransUnion advises. This will not only extend the period of active credit use but will also show lenders that you have a history of making timely payments. 

Worth noting: Each lender has their own criteria when assessing a borrower’s creditworthiness that sometimes goes beyond your credit score. In other words, lenders will evaluate whether or not you can repay the money on time, which means they will consider different aspects of your credit report. 

How Long Does Negative Information Stay on Your Credit Report?

Here’s the average time it takes to correct specific credit issues on a Canadian credit report, according to the FCAC.

Event	Recovery Time
Bankruptcy	6 or 7 years (depending on the province)
Collections or charged-off accounts	Up to 7 years
Registered consumer proposal	Up to 3 years
Hard Credit Inquiries	Up to 3 years
Missed Payments	Up to 6 years
Judgements	Up to 6 years
Debt consolidation loans	Up to 2 years

Why Should You Use Your Car Loan to Build Credit?

Here are a couple of reasons why building credit with a car loan can be effective.

Car loans can be easier to pay off 

Since your loan is secured by collateral, you are likely to get a lower interest rate than you would with unsecured personal loans. This in turn will lead to lower monthly payments, making it easier to manage and pay off the loan. 

If you think your interest rate is too high, you can refinance your loan down the line and get a better deal with your existing or another lender. 

You need to show financial responsibility 

To increase your credit score, you need to prove that you are able to manage your finances and make timely payments on your loans. To do that you need to take out loans, i.e. you need credit to build credit. 

Bear in mind that this strategy is only effective if you repay your loan on time every month. It is also important to keep the loan open for at least a year—demonstrating a pattern of consistency when making repayments can help improve your credit score. 

Car loan criteria are not as strict  

Most car loan providers have lower approval criteria, accepting borrowers with a credit score of 670 or lower. This is especially true if you apply for financing at a car dealership—whether they provide the money themselves or broker your loan with a bank or online lender, they are likely to accept applicants with a less-than-perfect credit rating.

Tips on How to Rebuild Your Credit With an Auto Loan

We will leave you with some advice on how to use your auto loan to rebuild your credit.

Pay on time

It is imperative that you make regular payments on your loan. Missing an instalment will have a negative effect on your credit score that can take months or even years to fix. 

Don’t buy a Cadillac when you can only afford a Toyota

Overspending is a sure way to get into debt—if you buy a car you can’t afford, you will be stuck with payments that are too high for your budget leading to late and missed repayments.  

Apply with several lenders at the same time

Multiple inquiries carried out for the same purpose in the same period of time count as one inquiry, Equifax says. 

Check on your credit report

You need to have a clear idea of how much you owe and what your credit file looks like before lenders see it. If there are outstanding payments, get those settled before you apply for a new loan.

Try to raise a bigger down payment

The more you put down as a deposit, the lower your loan will be. Plus, it is easier to make regular payments on a smaller loan.