Absolutely! A car loan is a wonderful way to build your credit score – as long as you keep up with the rest of your bills, too. This is because an auto loan is a type of installment credit that can add a lot of positive payment history to your credit reports, but it can't build your credit score all on its own.
Building Your Credit Score With an Auto Loan
Getting a car loan is a great place to start building your credit score, but you've got to handle it well if you want to see results. In fact, an auto loan can be one of the best ways to build credit because it impacts so many aspects of your credit report at once, typically for several years.
This can be either good or bad, though, depending on how you handle your car loan. An auto loan has to work in conjunction with the other aspects of your financial life. Simply making your car loan payments on time won't help your credit score if you're letting other bills slide. A negative impact from a missed or late payment on any of your accounts can make a much bigger impact on your credit score than a positive payment.
How a Car Loan Improves Your Credit
An auto loan is an installment loan that you take on for a set time, and repay with set monthly payments until the full financed amount and interest charges are paid. Since a car loan typically lasts for several years, it's a good opportunity to build a solid repayment history.
Payment history is the single biggest factor that makes up your credit score – 35% of your FICO score. The FICO scoring model is the most widely used credit scoring model by auto lenders. On it, payment history works hand in hand with the other factors that make up your credit score: amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%).
The better you keep up with all your loans and finances, the better off you generally are from a credit perspective. At the same time, a car loan is typically the second most expensive thing people use credit for, which makes it a big player in determining your credit standing.
Credit Tips to Use With Your Next Auto Loan
Since an auto loan can't build or rebuild credit all by itself, it's important to pay attention to all the moving parts that go into your credit. Here are a few credit tips you can use along with a car loan to improve your credit situation:
- Pay attention to your credit score and reports. Credit isn't etched in stone. That three-digit number fluctuates over time based on the information in your credit reports and how you’ve handled credit in the past and now. To find out how your reports are doing visit www.annualcreditreport.com. Now until April 2021, you can get a free copy of your credit reports each week from the three national credit bureaus – Experian, TransUnion, and Equifax. Each credit bureaus may be reporting different information, so check all three for consistency. You can get your credit score as well by paying a small fee to a bureau, but you should check to see if your bank or credit card provider offers free access first.
- Keep your amounts owed reasonable. The amount you owe on all your lines of credit combined is sure to be higher after taking on an auto loan, but, as a general rule, you should try and keep up with what you owe, and work to pay on all your loans and credit cards. One part of the amounts owed category is your credit utilization ratio, which has to do with revolving credit (credit cards). The rule of thumb is that your credit score really starts to be negatively impacted when you’re using 30% or more of your available credit card limits. Keeping your balances below this threshold can help you improve your credit score, and it also shows lenders that you don't take on too much credit and never pay it off.
- Pay all your bills on time. As we mentioned before, a negative mark or missed payment carries more weight than an on-time payment. However, if you consistently make all your payments on time, that positive payment history outweighs many things that could bring down your credit. After all, payment history makes up the largest part of your credit score.
- Take on new credit responsibly. If you apply for every credit card you're offered, you're likely to have a red flag pop up after a while. The point of taking on new credit is to have it there to use when you need it, and not to abuse it. So, the next time you're offered another line of credit at a clothing store or favorite online site, consider your credit score. Taking on lots of new credit in a short period of time can damage it for a while.
Completing the Car Loan Credit Puzzle
Getting a subprime car loan is a good place to start if you both need a vehicle, and a boost in the credit department! Here at Auto Credit Express, we want to show you the way to get started.
Are you ready to take the next step toward building better credit with your next auto loan? Get connected to a local dealership that's signed up with lenders that can get the job done. Simply fill out our fast, free, and easy car loan request form and we'll get right to work for you!