Do your monthly car payments impact your credit score? Find out.

Any kind of loan out in your name will impact your credit score. Whether this is in the form of a credit card, mortgage, or car payment, your credit score will be impacted. Depending on how you handle the loan this can be either good or bad. A car payment, for example, can affect your credit score. But just how will it impact you and whether you can land additional loans (such as a mortgage) down the line?

Here's what you need to know about your car payments and how it impacts your credit score. 

Are You Paying It On Time?

On time car payments, and on time payments on any loan, is important. A single forgotten or seriously late payment can impact your credit score in a negative way. Typically a late payment will not show up on your credit. You'll likely pay a late fee through your lender, but it won't impact your credit. This is because your lender has to inform the different credit bureaus of the late payments.

This is, to put it mildly, an inconvenience for the lender, and they would rather avoid that. So, typically, a late payment of a few days or even a few weeks won't show up on your credit. However, if you miss a payment entirely and a second payment comes do while you still have not yet paid the first, this will likely be reported and it will impact your credit score. 

So do your best to stay on top of your loan payments. Direct withdrawal payments are helpful as you can set it up and forget about it (just make sure there's money in your account for this). If you'd rather manually pay your loan though just note it in your calender. You can set reminders on your mobile phone and computer so you know a car payment is due. But don't fret if you're late by a few days. It won't appear on your credit score. 

Established Line Of Credit

In some ways, having a car loan can help your credit score. In order to build a credit score you need to have lines of credit under your name. You also need to be making payments. With a car loan you do this. Now, when you first take out the car loan your credit score will drop.

This is because you will suddenly owe tens of thousands of dollars that you didn't owe prior to purchasing the vehicle. However, as you make on time payments your credit score will go up and your car loan will be seen as a favorable aspect of your credit score (especially if you are just starting out in building your credit score).

Debt to Income Ratio

This may not appear in your credit report but it will appear when you try to take you another loan (especially a mortgage). When taking out larger loans the lender will look at more than just your credit score. One aspect will be what is known as a debt to income ratio.

This means how much money to you have to pay out to debt versus how much money you are bringing in. So, for example, let's say you make $4,000 a month. Then you have rent of $1,000 a month, one credit card bill costs $500, and your student loans cost another $500. This means you pay $2,000 in debt every month, which means you have a 50% debt to income ratio. If you take out a car loan this will impact your debt to income ratio. 

Monitor Your Credit Score

It is always a good idea to stay on top of your credit score. So talk to your bank about credit score services offered. It's a great way to avoid credit problems and to know what is necessary to fix and improve your credit score. 

Rebuilding your credit? Connect with auto lenders that understand >>

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