Will an auto loan help or hurt my credit?
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I’m in the market for a new vehicle. Will this loan help my score or hurt it? I’m planning to purchase a home next year.
Initially hurt. Eventually help
Initially, your score will drop anywhere between 20 – 60 points, depending on your specific credit standing. A thin credit see larger drop than a thick file. Any new credit cause a drop in credit score because the risk of lending you money increases because of your higher debt to income ratio. So you will certainly see a drop in your score immediately.
On the long run however this loan can benefit your credit. As time passé you will see your score bouncing back to where it was, and possibly higher. Just how much depends in your credit standing and your ‘credit file thickness’. For most people it takes 6 – 8 month for this credit score to bounce back.
Installment loans are good for building credit. As a rule of a thumb – never make any change in your credit standing at least 6 months prior to taking a loan. Since you’re planning to apply for a mortgage a year from now – Your credit score will benefit from it.
Just keep in mind that credit score is not everything. That car loan will be included in your debt-to-income ratio when you apply for a mortgage. It’s hard if not impossible to tell what affects the lending decision more – a slightly higher score or a lower DTI.
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