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Q: I’m about to buy a new car. Will doing this hurt or help my credit?
A: It depends. If you get a car that is within your budget and make your payments on time every month, your credit score should start to go up. Payment history is the largest portion of your credit score, and if you show that you pay all of your payments, and pay them on time, creditors will want to lend to you since you are low risk.
On the other hand, financing a car affects your debt-to-income and debt-to-available-credit ratios. If the car loan leaves you with little money left each month, it will probably hurt your credit score because you have too much debt for someone with your level of income. Banks and financing companies don’t want to lend to someone who is already struggling, because you might not be able to pay them back.
If financing a car initially drops your score 5 points or so, don’t worry. When the dealer requests your credit score to see what interest rate you qualify for (or if you qualify for a loan at all), this is called a credit inquiry, and can lower your score by around 5 points. This shouldn’t affect you, though. Paying your car payments on time will very quickly restore your credit score to even higher than it was before the credit inquiry.