Financing a car can do more than help you get behind the wheel — it can also help you build or strengthen your credit- but only if you manage it wisely. Here’s what to know before signing on the dotted line:

How auto financing affects your credit score

When you finance a vehicle, it usually gets reported to Equifax, Experian, and TransUnion, which are the three major credit bureaus. From there, it appears on your credit report as an installment loan, a category that includes other types of long-term borrowing like student loans and mortgages.

The largest part of your credit score — about 35% — is derived from your payment history, so making every car payment on time is the single most important way to build or improve your score through auto financing. Missed or late payments can do long-lasting damage and even lead to repossession or collections, both of which remain on your credit report for years.

Another factor, credit mix, accounts for about 10% of your score. Financial institutions like to see that you can responsibly manage different types of credit. If you’ve only used credit cards before, adding auto financing to your profile can demonstrate your ability to handle installment debt as well.

What happens as soon as you apply

Applying for auto financing usually triggers a hard credit inquiry, which may cause a slight, temporary dip in your credit score for a couple of months. However, it's outweighed over time by a strong payment record.

It’s also worth noting that if you apply with multiple financing providers within a short time frame — usually around 14 days — these typically appear as one inquiry for credit scoring purposes.

Common mistakes to avoid

If you’re a first-time buyer, steer clear of these missteps:

• Not checking your credit score beforehand: Know where you stand before applying, and correct any errors

• Focusing only on monthly payments: A longer finance term may lower your monthly bill, but it often increases the total amount of interest you’ll pay

• Not shopping around: Compare offers from banks, credit unions, and fintech companies — not just the dealership’s in-house financing

• Rolling negative equity or add-ons into your financing: This increases your balance and the total cost of ownership

The pros and cons of paying off a vehicle early

Our final piece of advice is this: While it may seem smart to pay off auto financing as soon as you can, an early payoff sometimes has a short-term impact on your credit, especially if it reduces the average age of your credit history. Still, this effect is minor, and the long-term benefits of saving on interest may matter more to you. That said, if your goal is to build credit, making consistent, on-time payments over the full term can be very beneficial.

Ready to take a step towards credit building?

If you want to use auto financing to establish your credit, Credit Acceptance can help. Our online pre-qualification process is fast, secure, and we’ll connect you with local dealers near you. To see what kind of financing may be available to you, start the pre-qualification process today.