What is a Credit Score?
A credit score is a measurement of a consumer’s creditworthiness. It is based on one’s credit history and the higher the number, the better chance at getting loans in the future. Lenders use your credit score when reviewing and approving loan applications. Thus, you must pay attention to your credit rating and repay your loans and credit cards on time.
Wondering whether financing a car increases your credit score? Well, it depends on your payment performance. Auto loans can affect your credit score – positively or negatively. If you want the results to be favorable, you must ensure that your auto loan payments are always on time and in full amount as agreed. Car financing also helps diversify your credit mix and thus can help improve your rating.
How Buying a Car Impacts Your Credit
As previously mentioned, how your car financing affects your credit score depends on each individual’s financial situation and history. How reliable you are with your loan payments impacts your credit rating. But don’t panic when you see a dip in your score after taking out your car loan. That’s normal when you take out a hefty new loan or debt. Your credit score should bounce back after you start making on-time payments.
Your payment history is a big factor when it comes to calculating your credit score. Hence, you have to make sure that all of your loan payments are on time and in full. One great advantage of taking out an auto loan is it helps in diversifying your credit mix. Lenders favor consumers with a mix of revolving credit and installment credit in a credit file report.
Building Credit with Auto Loan
You can take advantage of using your car loan to build your credit score if you know how to use such an opportunity effectively.
Paying monthly on a loan of any kind helps boost your personal credit trust factor, and tells financial institutions you are capable of making regular payments. Of course, a home mortgage is one of the best types of loans to build credit but to get a home loan applicants have to qualify on multitudes of factors. Auto loans are however much easier to acquire. Having a stable home address can help when it comes time to get an auto loan as the financier knows you and the car you buy are more likely to be locatable in the event you default on the land.
As this type of loan is a secured credit type, it will have lower interest and affordable payments. Here are a few tips on how you can build your credit while financing a car:
- Save on down payment – When you have enough money for a down payment, the amount of loan you have to take out will get smaller. In this case, the lender also has lesser risk to assume. Save at least 10% of the purchase price for your down payment for better chances of getting approved for a loan.
- Update all your current credit – Make sure you don’t have past due, overextended or credit sent to collections. Get all your current credit updated with at least the minimum payments. You should also make sure to always pay on time. Every missed and late payment will show up on your credit report and this will make lenders think twice before approving your loan application.
- Don’t sabotage your own chances – Keep from shopping and sending your loan application all over the place. Some people do this thinking that out of a few rejections, they might get one approval. However, this can sometimes hurt your chances as each time you apply for a loan the application is indexed on your overall score.
- Pick a car loan that you can afford – If your debt-to-asset ratio is high or you only earn a modest income, it is better to pick an affordable car for your loan application. It would be easier to build your credit when your monthly payments are low, and you aren’t stretching your ability to repay.
When you have a below-average credit rating, it is much more advisable to get a car that you can afford to pay off early. This way, you can reestablish your credit score faster. Banks and lenders will be more comfortable giving you a loan if the car is less expensive and the monthly payment is something you can afford.
Other Ways to Build Positive Credit History
Although many experts say that an auto loan with updated and on-time payments is one of the best ways to build your credit, it is not ideal to take out that loan if you have low credit scores. If you have bad credit history, you can start repairing your credit rating by paying off a portion of your debt and making sure that all payments are updated.
If you have no credit score yet, you can start by applying for credit cards and using them regularly. It doesn’t have to be big purchases. You can use them for small purchases, ones that you can pay off in full and on time.
You may think that using a debit card is a smart financial choice as you cannot over-extend your finances, however, using a debit card has far, far less effect on your credit score as opposed to a credit card. If needed, you can apply for a secured credit card that will appear to the financial institutions a regular credit card however you will actually be paying a lump sum, often just $300 ahead of time, and the card’s limit is based on this upfront payment amount.
Selling Your Car
If you’re thinking of financing a car and need to firstly sell your current vehicle, be sure sure consider OfferMORE as we give buyers the most cash for their cars, tucks and SUVs, you’ll have more buying power and the ability to offer a higher down payment, thus lowering your loan amount and making an early pay-off more possible which will help you grow your credit score even faster!