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If you’re considering buying a car in 2023, be prepared to dig deep. According to the latest data from the Kelley Blue Book, the average new car price is now $48,681, and the average used car is over $27,000.
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What these numbers mean varies from person to person, but one thing is certain. Loans for a set of wheels will affect your credit score unless you plan to buy the car with cash.
Whether the effects are painful or helpful is up to you.
Make an honest inventory of your budget against these average prices and make sure your credits are in prime condition before calling the dealer.As you’ll learn, the only cars worth signing Loans can afford.
No need to worry about hard pulls unless you have
Whether you buy for pre-approval or finance your car through a dealer, you’ll end up with a difficult inquiry. A hard tug can lower your score by a few points, but it’s temporary.
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The exception is if you have recently applied for a credit or loan. Continuous hard pulls can cause more serious or longer lasting damage.
If your credit is otherwise good, it doesn’t matter if you don’t apply for a new card or loan within six months of planning to go car shopping.
Buying a car improves your score — if you can swing your payment
Not only does buying a car not hurt your score negatively, but financing your vehicle can actually strengthen your credit in the long run. After the first Minor His hit when pulling hard, the score quickly recovers and then starts to increase.
This is because new loans add another account to your credit report, and every account in good standing increases your creditworthiness. It also helps to add to the account combination. Lenders prefer to use a mix of both revolving credit (such as credit cards) and installment credit (car loans). Every time you pay on time, you become more attractive to prospective lenders and can steadily reduce your overall debt.
However, all of these benefits are dependent on your ability to keep up with payments.
Getting in trouble also lowers your credit score
For all the benefits you can get from a healthy car loan that is in good standing, just one slip can ruin everything—and your credit.
According to Lending Tree, one missed car payment can drop your score by as much as 180 points.
From there, things only get worse — and rapidly. After 60 days, the score drops even further and becomes toxic to lenders who reject all but the worst loans at the highest interest rates. In the worst case, the blemish lasts for seven years before disappearing from the report.
Affordable car loans are credit kryptonite
After 60 days, you are in default and your lender will do everything possible to recoup your losses. That means sending the account to a collection, remanding the vehicle, and possibly filing a lawsuit for reimbursement. In general, none of these scenarios are good for your credit or financial life.
According to Experian, a remand or court judgment could drive the final nail into your credit coffin and render your persona worthless among lenders for the better part of a decade.
None of these scenarios are too far-fetched. In November 2022, CNBC reported that his car loan delinquencies reached their highest level in a decade.
Or you might end up robbing Peter and paying Paul, ignoring other less important payments to avoid falling behind on your car loan. Either way, the result is financial chaos.
After all, buying a car in and of itself doesn’t hurt or help your credit. Whether you exit the loan with a better score than you started with, or with a worse score, depends entirely on your ability to keep the end of the contract, so shop wisely.
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This article originally appeared on GOBankingRates.com: How Does Buying a Car Affect Your Credit?
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