Taking out an auto loan is a big financial step—and like any form of credit, it can have a significant impact on your credit score. Whether you're financing your first car or upgrading to a new model, it’s important to understand how an auto loan can both help and hurt your credit, depending on how you manage it.

The Initial Impact: Hard Inquiry

When you apply for an auto loan, lenders perform a hard inquiry on your credit report. This can cause a slight dip in your credit score—usually around 5 to 10 points. While this drop is usually temporary, multiple loan applications within a short period can add up. The good news? Credit scoring models typically treat multiple auto loan inquiries within a 14–45 day window as a single inquiry, so you can shop for the best rates without too much damage.

Boosting Your Credit Mix

An auto loan can positively affect your credit mix, which accounts for about 10% of your overall credit score. Having a healthy mix of revolving credit (like credit cards) and installment credit (like auto loans) shows lenders that you can handle different types of debt responsibly.

On-Time Payments Matter Most

The biggest way an auto loan affects your credit score is through your payment history, which makes up 35% of your credit score. Making on-time payments consistently will gradually boost your score and build a strong credit history. Even one missed or late payment, however, can cause a significant drop—so staying on top of your due dates is essential.

Loan Balance and Credit Utilization

Although auto loans aren’t factored into your credit utilization ratio the same way credit cards are, your loan balance still plays a role. Paying down the principal over time helps reduce your total debt and shows that you’re managing your obligations well—both of which are good for your credit health.

Paying Off the Loan: Pros and Cons

Once you’ve paid off your auto loan, you’ll no longer have that installment account contributing to your credit mix or payment history. While closing a long-standing account may slightly reduce your score, the positive payment history remains on your report for up to 10 years, continuing to benefit your credit profile.

Final Thoughts

An auto loan can be a powerful tool for building or improving your credit score—if managed wisely. Make timely payments, avoid borrowing more than you can afford, and keep an eye on your overall credit activity. Done right, financing your car can drive your credit in the right direction.