When you finance a vehicle, the loan is reported to the three major credit bureaus: Experian, Equifax, and TransUnion. Each monthly payment you make is recorded and becomes part of your credit history. Consistently making on-time payments demonstrates financial responsibility, which can help raise your credit score over time.

Financing also diversifies your credit profile. Credit scores consider the variety of credit accounts you have, such as credit cards, mortgages, and installment loans. Since an auto loan is considered an installment loan, adding it to your credit mix can be beneficial, especially if most of your existing credit comes from revolving accounts like credit cards.

Before approving financing, lenders review your credit history to determine risk. According to NerdWallet, most auto lenders are willing to work with borrowers who have a range of credit scores, but higher scores generally lead to better loan terms and lower interest rates. Scores in the mid-600s are often considered acceptable for many lenders, but drivers with scores above 700 may qualify for more favorable offers.*

It’s important to note that even if your credit score isn’t perfect, financing a car responsibly can help you improve it.

Financing a car can be a smart way to build credit for both new and experienced borrowers. One key benefit is that car loans typically span several years, giving you a consistent opportunity to show payment reliability. Over time, this payment history becomes a strong indicator of your ability to manage debt, which is a significant factor in credit scoring models.

Another benefit is the chance to establish or improve credit if you have limited history. For younger buyers or those rebuilding their credit, successfully managing an auto loan provides a reliable pathway to stronger scores. In addition, improving your credit with an auto loan can open the door to better financial opportunities, such as lower rates on future car loans, mortgages, or personal loans.

While financing can help build credit, it’s important to manage the loan effectively. Always aim to make payments on or before the due date to avoid penalties and negative marks on your credit report. Setting up automatic payments is a simple way to stay on track.

It’s also a good idea to take a loan amount that feels comfortable for your budget. This reduces the likelihood of missed payments and keeps your finances balanced. Regularly checking your credit report allows you to track progress and ensure that your lender is reporting payments accurately.