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The Effect of Car Payments on Your Credit Score

Car Payments

Buying a new car is an exciting aspect, but car payments and your credit score can impact what car you can buy and how much you can spend. Credit scores largely vary from one person to another depending on his/her credit history. Here’s what you need to know about credit scores and car payments.

Car Payments and Credit Scores
Obviously, the higher the credit scores, the better your chances are of securing a car loan. Lenders are more confident that you will repay it on time and they are not taking any risks in lending to you. What’s more, lenders may even compete amongst themselves for offering you an auto loan. You will be offered loans at low-interest rates and sometimes, you may even qualify for 0 percent financing. Lower credit scores, on the other hand, call for higher rates of interest. People with low scores are often asked to make a hefty down payment along with paying higher interest rates.
Your credit utilization will be lowered by these car loans. You can, therefore, see some improvements in your score until you start paying out the loan. Once the repayment process has begun, the credit utilization increases and brings down your credit scores. This trend continues until the entire loan amount is paid off or the balance is less than 30 percent of the original sum.
Paying Off Early
Are you considering paying off your car loan early? You need to first make sure that your loan agreement does not penalize you for this action. Continuing to make car payments can prove beneficial. This, of course, must be done in a timely manner. By properly managing open credit lines, you can solidify your credit history and gain easy access to future auto loans. But, if you are struggling to keep up with your payments, you may want to inquire about a loan extension with your lender. This will give a brief moment of financial relief and will help you plan your future payments effectively.
What Do Lenders Look For?
Lenders can understand the likelihood of your loan repayment from five factors of your credit score.
Payment History — 35 Percent of Your Credit Score
Nobody likes to lend money to those who are not committed to repaying the debt. A missed payment, mortgage default, bankruptcy and late payments damage this part of your credit report.
Credit Utilization — 30 Percent of Your Credit Score
The lower your debt, the greater your chances are of securing a loan. You may want to keep your credit utilization under 30 percent though.
Length of Credit History — 15 Percent of Your Credit Score
Having a lengthy record of liable credit use is always good for credit scores. The frequency of your card usage also plays a role in this section.
New Credit — 10 Percent of Your Credit Score
While having a solid credit history works well, opening new credit cards within a short duration may backfire. Your lender may express doubts on your repayment capability in case you choose to max out on all your cards. Avoid closing any credit lines before applying for a car loan.
Credit Mix — 10 Percent of Your Credit Score
Having different forms of credit and managing your finances well enough that you can pay off all your monthly dues, gives you the edge when it comes to calculating your credit score.
Credit scores and car loans are tightly linked. A variation in one can influence the other. So, it is always safe to maintain a good credit score and be diligent in repaying your car loan.

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