How Buying a Car Can Lower Your Credit Score
The end-of-year car sales are upon us, and while the deals are usually outstanding during this time of year, you should also consider how buying a new car could affect your credit.
Specifically, how it could affect or lower your credit score.
Your FICO credit score is calculated by a complex algorithm involving an extensive list of things that either positively or negatively affect your credit score. Right now, we want to focus on how a car purchase can affect our score. I want to focus on how it could potentially lower your credit score.
The Credit Check
Unless you’re purchasing the vehicle with cash – in which case it wouldn’t affect your score – the first step in the purchase process would be to qualify for a car loan. The method of qualification includes a credit check. If you have already had your credit run several times that same year, having it checked again could negatively impact your score. This can be extra dangerous if your credit score is low, as you may have to apply with several different lenders before getting approved. If that is the case, your credit will be run several times, lowering your score even further.
The next area that could negatively affect your score is the debt-to-income ratio. One of the pieces in the FICO score puzzle is looking at how much debt you have versus how much your income is. If you already have a lot of debt – such as a mortgage, student loans, credit cards, doctor bills, etc. – then increasing that debt by adding a car loan, especially if it’s a large amount, can seriously impact your credit and lower your score.
On the flip side, someone with no debt but poor credit – such as someone who recently went through bankruptcy – could improve their credit score by purchasing a new car. Adding some debt and making regular payments helps show they’re financially stable and adds positive credit history.
Lastly, you want to consider the monthly payments. While you don’t want to get a payment plan over five years, your monthly payments could also be high if you have poor credit and your interest rate is high. The last thing you want to do is accept a monthly payment that you can “get by” with. Always remember that cars have expenses outside of monthly payments – such as oil changes, new tires, maintenance, battery replacements, etc. – which could cause financial problems down the road.
When purchasing a new vehicle, make sure you can easily make the monthly payments to avoid dealing with late payments. Late payments can seriously damage your credit and lower your score. Many people tend to purchase a vehicle with reasonable monthly payments but seldom consider the instances where things don’t go as planned. Make sure you can easily make the monthly payments with room to spare.
The interest rate will be a significant factor in the monthly payment. That is primarily affected by your credit score. If you have a low credit score, your interest rate will be high, which will increase your monthly payments significantly. If it’s going to be tight, your best bet is to focus on improving your credit score before buying a new car.
For more financial advice or assistance with credit repair, contact Credit Repair Enforcers for a free consultation.
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