HOW AN AUTO LOAN CAN INCREASE YOUR CREDIT SCORE
Posted on: Nov. 12, 2016 in Debt, Credit Score, Car Loans
how-an-auto-loan-can-increase-your-credit-score

There are five key factors that are used to determine your credit score. If your score is low, you may think taking on an auto loan is the last thing you should do. However, there are a few ways that getting an auto loan can actually improve your score.

how-an-auto-loan-can-increase-your-credit-score

First, let’s talk about the two factors a new loan can’t help with:

  • Amounts Owed (30% of your score) - Having debt doesn’t necessarily make you a high risk for a loan and doesn’t necessarily lower your score. However, if you’ve already used a high percentage of your available credit, meaning you’re almost maxed out, a lender may worry you’re overextended. Borrowing more may not help your score.
  • New Credit (10% of your score) - Again, opening a new line of credit isn’t always the mark of a high risk borrower. But if you open multiple loans or new credit cards at once, lenders will again worry about overextension, even if you haven’t used the credit yet. If your credit history is short, this is especially important. If you’re thinking about obtaining more credit, do so thoughtfully.

The other three factors that make up your credit score CAN be helped by obtaining an auto loan. Let’s explore those:

  • Payment History (35% of your score) - Of all the factors, this one is weighed the heaviest. And that makes sense, because the most important thing to a lender is that you’re going to pay them back! If you’ve had problems in the past and have late payments on your record, showing that you’re now able to make payments timely (assuming you can) will improve your score. Past mistakes can be made up for with responsible borrowing now.
  • Length of Credit History (15% of your score) - This is especially important for younger people or those who’ve never borrowed before. If you don’t have a credit history, your score will be lower. The best way to build a solid history is to borrow wisely and then prove you can pay back the loan. An auto loan will provide you with a set amount to be paid back monthly so you can factor it into your budget. Showing you can pay this debt off will reflect well in your score.
  • Credit Mix (10% of your score) - There are several types of credit including credit cards, retail (store) lines of credit, installment loans (like auto loans), and mortgage loans. If you’ve only had credit or retail cards before, known as revolving credit, your history will be lopsided. You need the other type of credit, installment loans, to balance it out. While a mortgage maybe a bit more than you’re ready to bargain for, an auto loan can build up that side of your history with a lower payment amount, setting you up for success.

If you’re in the market for a car but worry about dinging your credit again, keep in mind the potential upside. You may find that having the car you need will increase your score, leading to better buying power in the future.

If you need auto financing but your credit is keeping you from getting approved, CreditYes can help! We can match you with a dealership in your area that will be with you every step of the way. Our service is fast and free. Fill out our secure online application and get behind the wheel of your next car today!



GET APPROVED NOW!