Does Paying a Car Note Build Credit?

While many people have heard about credit scores and credit reports, these pieces of important consumer financial information often remain a mystery. If you're paying back your bills on time and end up paying off a car loan or car note in a timely manner, this will likely impact your score positively.

Reports and Scores

Whenever you pay a bill or get a new form of credit, that transaction is included in your credit report. These reports are created by credit reporting companies and contain a history of all your credit transactions of the past seven to 10 years. Your report itself does not have a credit score, but companies use the information on your report to calculate a score. How a score is computed is up to each company.

Score Factors

While there are different kinds of credit scores, and each score is derived by a different formula, scoring companies generally use the same factors when determining a score. For example, the Fair Isaac and Company score, commonly referred to as a FICO score, is one of the most common credit scores used. This score is based on five main factors: payment history, amount of credit owed, length of credit history, lines of new credit and the type of credit used.

Score Impact

If all other factors are equal, paying off loan on time generally increases your credit score. Your history of making timely--as in, not late--payments forms a large part of your credit score. By making on-time payments you show you are capable of using credit wisely and are not a risk to a creditor considering lending you money. Paying off your car note, as long as it gets reported on your credit report, will have a positive impact on your score.

Other Considerations

Paying off a car loan in and of itself will likely raise your score, but that doesn't mean you'll have a good credit score in and of itself. If, for example, you've recently gone through a bankruptcy, your score will likely be low for a significant length of time regardless of how many bills you pay off. If, on the other hand, you pay off your car note after a long history of making timely payments and have not missed other payments, you'll likely have a good score.