Can You Build Your Credit Score With An Auto Loan?

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Absolutely! A car loan is a great way to boost your credit score, as long as you keep track of the rest of your bills as well. 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 alone cannot build your credit score.

Build Your Credit Score With An Auto Loan

Getting a car loan is a great way to start building your credit score, but you have 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 many aspects of your credit report at once, usually over several years.

It can be good or bad, depending on how you handle your car loan. An auto loan should work in conjunction with the other aspects of your financial life. Just making your car loan payments on time won’t improve your credit score if you let other bills slip away. A negative impact of a missed or late payment on one of your accounts can have 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 out for a fixed term and repay with fixed monthly payments until the full amount financed and interest charges are paid. Since a car loan generally lasts several years, this is a good opportunity to build a solid repayment history.

Payment history is the most important 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. In this regard, 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 composition (10%) and new credit (10%).

The better you take care of all your loans and finances, the better you generally do from a credit standpoint. At the same time, a car loan is usually the second most expensive thing people use credit for, making it a big player in determining your creditworthiness.

Credit advice to use with your next car loan

Since a car loan cannot create or replenish credit on its own, it’s important to watch out for all the moving parts that go into your credit. Here are some credit tips you can use with a car loan to improve your credit situation:

  • Pay attention to your credit score and your reports. Credit is not set in stone. This three-digit number fluctuates over time depending on the information in your credit reports and how you have handled credit in the past and now. To find out how your reports work, visit www.annualcreditreport.com. 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 bureau can report different information, so check all three for consistency. You can also get your credit score by paying a small fee at an office, but you should first check if your bank or credit card provider offers free access.
  • Keep your amounts owed reasonable. The amount you owe on all of your combined lines of credit will certainly be higher after you take out a car loan, but as a general rule you should try to maintain what you owe and work to pay off all your loans and credit cards. Part of the category of amounts owed is your credit utilization rate, which has to do with revolving credit (credit cards). The rule of thumb is that your credit score really starts to be negatively affected when you use 30% or more of your available credit card limits. Keeping your balances below this threshold can help improve your credit score, and it also shows lenders that you don’t take too much credit and never pay it back.
  • Pay all your bills on time. As we mentioned earlier, a negative rating or missed payment carries more weight than a payment on time. However, if you regularly make all of your payments on time, that positive payment history outweighs many things that could bring your credit down. After all, the payment history is the biggest part of your credit score.
  • Accept new credit responsibly. If you apply for every credit card that is offered to you, you might get a red flag after a while. The advantage of taking out new credit is having it there to use it when you need it, and not to abuse it. So the next time you’re offered another line of credit at a favorite clothing store or online site, consider your credit score. Taking a lot of new credit over a short period can damage it for a while.

Complete the car loan credit puzzle

Obtaining a subprime auto loan is a good place to start if you need both a vehicle and a boost from the credit department! Here has Auto Express Credit, we want to show you how to get started.

Are you ready to take the next step to better credit with your next car loan? Connect to a local dealer registered with lenders who can do the job. Just fill out our quick, free and easy form car loan application form and we’ll get to work for you!

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