Applying for Loan/Diversifying Credit
Your credit history is a measure of five factors, each weighted differently, that show creditors your ability to repay a loan or pay bills on time. The factors and how they count toward your credit score: payment history (35 percent); amount owed (30 percent); length of credit (15 percent); credit history (10 percent); and types of credit (10 percent).
An automobile loan comes into play under types of credit. The credit bureau considers the mix of credit you have, including credit cards, finance loans, installment loans (such as an automobile loan) and retail accounts. For this purpose, a car loan represents the ability to regularly pay off a bill over the course of several years; this is known as an installment debt. By comparison, a credit card can often be paid off more quickly or only as a minimum percentage every month (known as revolving debt).
Long-Term Benefits
Many borrowers might not consider taking out more forms of debt to be a good thing, but from a credit score perspective, paying off an automobile loan can signal to creditors that you are worthy of future loans and credit lines. As time goes by, you continue to get more points as you get closer to paying off the entire loan amount.
When you pay off the loan, you will experience the most benefits from diversifying your lines of credit. As an added boost, this report will stay on your credit report for up to 10 years, giving you an advantage with auto lenders that are considering extending you a line of credit. Paying on time also will help your overall payment history, which accounts for 35 percent of your score.
Help for Those Rebuilding Credit
When a person faces financial difficulties, such as filing for bankruptcy, they sometimes are allowed to keep their automobile loans. Continuing to make payments on the auto loan can help to rebuild credit, as the person gets a boost for payments that are made on time.
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