Will a Car Payment Affect My Credit Score?
When you take out a loan to purchase a car, you will end up with monthly car payments. If you’re buying a new or pre-owned Honda, you can choose from a number of suitable car loans offered by the Honda car dealership. You might end up with competitive and beneficial rates, extended warranty programs, value-adds, quick approvals, and other benefits from the dealership.
When considering making or missing a car payment, you should know what factors influence your credit score. Here are the ways your car payments can affect your credit score.
Taking Out a Car Loan
Whenever you take up new credit, it does lower your credit score slightly. This won’t affect you much in the long run, but keep this in mind when you set out a plan to reach your personal credit score goal. Your credit score will drop a few points whenever you raise your debt. However, as you keep paying off your loan on time with the full amount, your credit score will bounce back. Not only will you recover your lost points from the beginning, but you will also be able to gain more points. 35% of FICO’s credit rating system is based off your payment history, so making good payments is a great way to raise your score.
Only 10% of your score makes up for new credit taken out. Taking out a type of loan that you’ve never taken out before will contribute to the credit mix. This adds some weight to your credit score.
Here is a rough breakdown of what determines your credit score:
· Payment history – 35%
· Credit Utilization – 30%
· Length of Credit History – 15%
· New Credit – 10%
· Credit mix – 10%
These factors not only relate to car loans but to any kind of credit such as mortgages, credit cards, personal loans, or any other loans.
Car Loans and Existing Credit Score
Here is a brief look at how your existing score affects your car loan. Credit scores range between 300 – 800 points. Depending on which band you fall under, you will be eligible for a particular rate of interest on your car loan.
· 781-850 will give you a rate of interest at 3.68%.
· 661-780 gives you 4.56%
· 601-660 gives you 7.52%
· 501-600 gives you 11.89%
· 300-500 gives you 14.89%
Since the score affects the rate of interest, it’s a good idea to keep a good credit score and build it up over time.
Missed Car Payments
A payment is considered as missed if you have not paid the full amount on the day of the month agreed between you and the dealer. Whenever a payment is missed, the lender will inform the credit bureau. A missed payment will immediately and negatively impact your credit score. On top of that, the missed payment will stay on your report for seven years. After the seven years have passed, though, the mark will be deleted from your record.
If you forgot to make a payment, it’s not all over. Within a day of the missed payment, you can inform your lender that you are going to pay it off shortly. This should keep you in the green as long as you make the payment within 30 days. A delayed payment fee may be charged by the lender for each day the payment is delayed.