How to Improve Your Credit Score with an Auto Loan
Turn your car loan into a powerful credit-building tool
When was the last time you checked your credit score? If you're like most people, it hasn't been recently. Credit seems to be one of those things that no one thinks about until there is a need.
Why Credit is Important for Everyone
Credit is essential to everyone, no matter how well they manage their money. A good credit score means lower interest rates on credit cards and other lines of credit.
It also makes it easier for you to get financing when you want to buy a car, a home, or borrow for any other purpose. Conversely, poor credit makes all of these more challenging and more expensive.
Can Having a Car Loan Help My Credit Score?
The answer is YES!
Car loans can be an effective way to improve your rating. If you find a lender willing to approve you for a car loan even though you have bad credit, this loan can be very effective. Being consistent with your payments can increase your score by a third.
If you have a low credit score, take time to review your report. Try to figure out how to avoid problems in the future and identify any errors in the report. It all boils down to this: the best way to improve your score is to pay your bills on time and not miss payments.
How Your Credit Score is Determined
Payment History
Your track record of making payments on time is the most important factor.
Revolving Credit
How much credit you're using compared to your available credit limits.
Late or missed payments will damage your credit score. You can minimize the negative effect with positive activity. A car loan can help in this regard. If you pay your bills on time, every time, and never miss a payment, you will rebuild even a tainted credit score.
Past mistakes gradually fade, replaced by more recent activity. Consistent on-time payments on your auto loan will show lenders you're now a responsible borrower.
Six Steps to Improve Your Credit—Before and After You Get the Loan
Pay Down Overdue Bills
Take immediate steps to pay down any overdue bills. If you can't pay them off entirely, at least pay as much as you can initially, and then make consistent payments until the old debt disappears.
Dispute Credit Report Errors
Go over your report in detail and check for any errors. Credit reporting agencies make mistakes at times. If you find something in error, dispute it—it's your right to do so.
Save for a Down Payment
The more you can put in as a down payment, the better your chances of getting approved. You may even get a better interest rate on the loan.
Only Buy What You Can Afford
Be realistic about what you can afford. A high monthly payment can be very stressful. Identify the upper limit of what you can afford and don't exceed it.
Avoid Multiple Applications
Sending applications to several banks can reduce your chances of approval. Let ConsumerAuto do the shopping for you—we'll work with our network to find the best rate.
Keep Up with Payments
Once you have your car, ensure you always pay on time and in full. Failing to do so will result in a negative entry that remains on your credit report for seven years.
Why Auto Loans Are a Good Strategy to Build Credit
Easy Approval
Auto loans are comparatively easy to qualify for in Canada, even if your credit needs improvement.
Secured Loans
The vehicle is collateral, making these loans easier to get because of lower risk to the lender.
Build Credit
Consistently paying on time demonstrates financial responsibility and improves your score.
Pro Tip:
If your main goal is to build good credit, keep the car loan open even if you can pay it off ahead of time. Consistently paying a recurring monthly bill is the best way to achieve an excellent credit rating.
Possible Drawbacks to Auto Loans
We've discussed the positives, but there are a few drawbacks to getting an auto loan. Consider all sides of the issue before deciding to borrow:
Risk of Repossession
If you fail to make payments, the loan company will eventually have the vehicle repossessed. Not only will your credit score be severely damaged, but you'll also find yourself without a car.
Less Money on Hand
A car payment each month means less money for other expenses. Realistically assess your budget before buying to ensure you're not overextending yourself financially.
Higher Interest Rate
You'll pay a higher interest rate if you only qualify for a subprime loan because of bad credit. However, as you make regular payments, your credit score will improve, and you may be able to refinance at a lower rate.
Let Us Help You Improve Your Credit With a Car Loan
We've discussed how car loans can be an excellent way to rebuild bad credit. Make the whole process stress-free by getting the help of ConsumerAuto. We specialize in helping Canadians get the best rates on auto loans, regardless of their credit history.
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