Financing a car can be an excellent tool for building credit. But be careful, because neglecting a car loan is one of the fastest ways to knock your credit score down.
Financing a Car Adds Depth to Your Credit Report
Your credit reports show lenders five areas of credit use. These factors each impact your credit score, some more than others. When you finance a car you’re adding to at least three areas of your credit profile which can help you improve your credit score: payment history, credit mix, and new credit.
Of all the factors making up your credit score, payment history is by far the most important. It makes up 35 percent of your FICO credit score. One of the best ways to build your credit with a new loan is to make all your payments on time and in full. In fact, paying all your bills in full each month is a good way to keep your overall credit on a healthy track.
The other areas of your credit that are impacted – credit mix and new credit – each make up 10 percent of your FICO score. Your credit mix is improved by adding new installment credit, and new credit is also added because you’re taking out a new loan. Even though this section only makes up 10 percent of your score, it can serve as a red flag to lenders if you continually apply for new credit month after month.
How Fast Will a Car Loan Raise My Credit Score?
Auto financing is a journey that takes time and, ideally, your credit will continue to grow over the term of your loan. This means just because you’re approved and driving off in your new car doesn’t mean your credit will skyrocket overnight. Credit doesn’t go up and down by itself – many factors make it rise and fall regularly. Small dips from things such as applying for credit, or temporarily having high credit utilization typically only cause your credit to dip for a short time.
On the other hand, credit can drop rapidly if you’re not careful. To minimize the damage to your credit score and help it increase more rapidly, follow these tips:
- Pay all your bills on time and in full.
- Keep your credit utilization (how much of your available credit you’re using) at 30 percent or below. Don’t max out your credit cards.
- Don’t apply for multiple lines of credit all at once. If you’re rate shopping on an installment loan or credit card, keep all your inquiries within a 14- to 30-day window. This allows for multiple credit inquiries of the same type to count against you only once.
- Outstanding balances on lines of credit show up on your credit report. If possible, pay any outstanding balances to get your accounts current.
- Make sure you have a mix of both installment loans (car loans, mortgages) and revolving credit (credit cards).
Following these tips can help your credit improve overall. For even more improvement, make sure everything on your credit reports is accurate. Having inaccurate information removed or corrected by the reporting bureau can also raise your score.
Beginning with Bad Credit?
Sure, a car loan will help your credit improve, but what if your credit is already bad – won’t that stop you from getting a car loan? Actually, no, as long as you go to the right dealership and get financing through the right kind of lender. Not every dealer works with these types of lenders, and those that do don’t always advertise it.
Here at Auto Credit Express, we work with a nationwide network of special finance dealers that have subprime lenders available to help consumers struggling with poor credit. Bad credit, no credit, even bankruptcy – we want to help you get connected with a dealer in your area! The process is simple to get started, just fill out our online auto loan request form to begin now!