When it comes to building credit, taking out a car loan is one of the most effective ways to do so. Not only will you be able to purchase a vehicle, but you'll also be able to improve your credit score. However, it's important to understand how long you should keep a car loan in order to maximize its impact on your credit score. When you take out a car loan, it's important to make sure that you don't accrue too much interest.
Every payment you make for your loan is reported to each of the three major credit bureaus, and making timely payments will help your score increase over time. It's important to note that even if you pay off your car loan early, the account will still remain on your credit report for up to 10 years and continue to improve your score. The length of your credit history is also an important factor in determining your credit score. This is why it's important to keep credit cards open, even if you're not using them.
When you open a new credit account, such as a car loan, it can temporarily lower your score because it decreases the average length of your history. If you originally got your car loan at a higher interest rate due to low credit, you can refinance it once your score has improved in order to lower your monthly payments. Additionally, if you're looking to maximize the impact of your car loan on your credit score, it's best to keep making monthly payments. Before you go to the dealership, make sure that you take steps to improve your credit and reduce any existing debt obligations.
It's also important to remember that if you're late on any payments or miss them altogether, it could result in the lender returning your car and ruining your credit. If you want to increase your credit score by 100 points in 30 days, buying a car with a loan isn't the best option. An auto loan is an installment loan, like most student loans, mortgage loans, and personal loans. If you establish a strong payment history by keeping up with your monthly payments, however, it should help improve your long-term credit score.