How Can an Auto Loan Improve your Credit Score?
Tuesday 24, 2017
When looking at getting an auto loan to improve your credit score, the response will be all about perspective. There are some who believe that if you have good credit, there is no reason for you to get an auto loan. If, however, you are looking to build up your credit record over time, then you can get a car loan as this will show evidence of proper payments. The key to making an auto loan work for your credit score is to make sure that you avoid making mistakes, no matter how small these mistakes may be.
When you do this, then your credit score rating which may have started out low will have the chance of going up. When you are looking at building your credit score, getting a credit card to help you do so may be close to impossible. However, you can go to a car dealership and get them to offer you a car at terms that you both agree on. Often, this means that you may end up paying an interest that is higher than normal, however, the long term effect on your credit report will be well worth it. It also helps that those who are administering auto loans are able to use the cars themselves as security, meaning that the overall risk is lowered. This helps when it comes to avoiding default payments as you can sell the asset to repay the loan.
Your Credit Report and Credit Score
The auto loan will affect your credit report as well as your credit score. On your credit report, you need to look for it in two places where it will be listed. The first is the type of account where you will normally see that it is included in an installment account. The other types of accounts that you would find there are those for housing as well as for student loans. As long as you make your payments on time, then you will find that your credit profile will benefit from having an auto loan.
The second place that you will see the auto loan is on the current status. If you are making your payments as expected, then in this section, it will say that the account is ‘paid as agreed’. If you have any delays here or you are falling behind, it will be indicated as well. This is where your auto loan is likely to have the biggest effect on your credit score. Falling behind could mean that your lender repossesses the car due to the defaulted loan.
Where you need to share any concern is if you make a payment on time, but it registers as having been paid late on your credit report. This is when you should file a dispute as these types of errors are the ones that affect your credit score.
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Your Auto Loan and Credit Score
You can use your auto loan to improve your credit score when it is put together with a number of other loans, especially when they are different types. This is because it helps to build up your credit history. In the long run, this will have a positive effect on your credit score. When you have a loan, especially when the loan is a new one, then it reveals that you are able to mix up the credit that you have access to.
Auto loans are relatively short-term and can be paid off with ease. Even when you have paid off the loan, it will still appear in your report as good debt. Good debt reveals that you have been able to handle your debt well, and have completed the payment as expected. This shows that you can be trusted with more credit. Furthermore, the longer your credit history revealing good debt, then the better it is for your score. Therefore, you should leave your good account on record for as long as possible.
Choosing the Right Auto Loan to Improve your Credit Score
There is a process to making sure that you get the right auto loan so that you can improve your credit score. For this, you need to carry out some research and determine which are the lowest auto loan rates, lenders. This is because there are a number of lenders that will offer loans and you need to base your decision on research and understanding. This will cause you to make some hard inquiries, which will appear on your credit report. As long as you minimize the number of searches that you carry out, there will be no need for your credit score to be negatively affected.
While you are looking at making sure your auto loan is able to improve your credit score, you also need to take into consideration that there are times you may not be able to afford the car payments. When this happens, you need to speak to your lender so that you get some additional time to pay your loan. If this is not possible, then the next option would be to look at possible refinancing the loan so that you do not default and then negatively affect your credit.
The other reason that you need to ensure that your payments are made on time is so that you can get a lower interest rate. The higher your credit score, which is created based on your history, then the lower the interest rate that you will be charged. Over the life of the loan, this could mean that you are saving a considerable amount of money, even if the rate only comes down to a few interest points. With a car loan, you are showing that you have a lower risk when it comes to borrowing money and that you are able to handle debt when tasked to. This means that you should view your auto loan as a building block that reveals you are capable of attaining great credit.