Do I Need to Get a Loan to Build Credit?

Building a Credit History

Having a solid credit history creates a higher credit score. Things like on-time payments, a healthy mix of credit, and low credit card usage all improve your credit score. However, starting your credit history can be a struggle, since many new borrowers start off with a subpar rating – making it harder to get approved for credit in the first place!

You may have been told that the easiest way to build credit is by getting a loan. This holds a lot of truth, but there are other unconventional ways to build a good credit history for new and bad credit borrowers.

Ways to Easily Build Credit

Building a good credit score usually starts with taking on some form of credit, but there are many different ways to do this. The key to building a good credit score is establishing a good repayment history since your payment history holds the most weight in generating your FICO credit score. If you take on a new form of credit and make all the payments on time, you’re well on your way to building a good credit score. There are even credit building methods that don’t require applying for new credit!

Here are five different, easy ways you can jumpstart your credit history:

• Become an authorized user – An authorized user gets added to someone else’s existing line of credit, typically a credit card. If you become an authorized user, you usually get your own usable card and any reported activity on the account is reflected on your and the owner’s credit reports. Many young borrowers start off their credit history by becoming authorized users since it’s easier than getting their own line of credit.
• Credit builder loan – This type of loan is different from a traditional loan, in that you’re not paying off an asset like a vehicle or a house. Instead, you’re making payments that are put in a savings account until you meet your set goal and the money is yours at the end of the term. A credit builder loan is reported as a regular installment loan. This is a great option for borrowers who want to start a nice savings and build up their credit score at the same time.
• Credit reporting services – If you’re already paying for utilities, streaming services, or your phone bill, you may be able to get those accounts reported on your credit reports. Many utilities are not automatically reported to the credit bureaus, but adding them to your credit reports can be a great way to build credit – and you’re already paying for them so why not reap the benefits of your on-time payments? The credit bureau Experian offers a service called Experian Boost where you link your existing monthly obligations to your credit reports.
• Secured credit card – Unsecured credit cards can be tough to qualify for if you don’t have a lot of income or a poor credit score, but secured credit cards are easier to get into. A secured credit card is backed up by a security deposit and your deposit amount typically determines your credit limit. The payments and credit card are reported on your credit reports, and if you’re unable to pay what you owe, the security deposit is used for the required payment.
• Bad credit car loan – Getting approved for a traditional auto loan can be difficult if your credit history is sparse or your credit score is around 660 or lower. If you want to take on a car loan with a less than perfect credit score, then subprime financing could be for you. These lenders consider more than just your credit history, and the car loan is reported to the credit bureaus. Since the loan terms are typically at least four years long, auto loans have the potential to build a solid, long-standing credit history.

Are Loans the Best Way to Build Credit?

Saying there’s a “best” way to build credit is very subjective. Not everyone wants a credit card or even needs an auto loan. However, having some form of credit or a few accounts on your credit reports is a good idea in case you do need to borrow money in the future.

With a lower credit score, it makes it harder to qualify for a loan when you need one. Your FICO credit score is the most referenced scoring model when you apply for new credit. Most lenders put a lot of weight on your credit score and could deny you financing even if you have the income to repay the loan.

The best way to build credit is entirely dependent on your situation and what you need. If you need a vehicle and you want to build credit, an auto loan can do just that if you manage it well. If you want to build a savings account and raise your credit score, a credit builder loan could be great for you. Take time to examine your personal circumstances and what you need so you can choose a path that fits your life.

Is Vehicle Financing Your Path?

Auto loans are a common way to build credit. However, not every lender is willing to assist borrowers with less than stellar credit. Here at Auto Credit Express, we want to help you find a dealership that has bad credit lending resources.

Get started on your path to vehicle financing by filling out our free auto loan request form. Using our nationwide network of dealers that are signed up with subprime lenders, we’ll look for a dealer in your local area at no cost and with no obligation.