Your car and your credit are likely to be two major areas of importance in your life, and you may already have an idea of how the two impact each other. If not, know that there’s a way to go about establishing credit with a car and boosting your credit score and your credit report with a car. That said, you need to make sure you play your cards right to make the most of this unique opportunity.
The reason a car can help your credit score is that having auto financing on your credit report can help you out in the long run, but only if you make your payments on time. Miss payments or make late payments and your score can take a hit.
Specifically, an auto loan is an installment loan, which is worth pointing out because there are different types of credit accounts that have different impacts on your credit report. Other examples of installment loans include mortgages and student loans. Healthy credit diversity does wonders for your credit score, but that doesn’t mean you should go out and make an effort to have every type of credit there is even if you don’t need it.
How to Boost Your Score
The way to maximize your credit score and keep your lender happy is to make your auto loan payments on time every month. Another aspect of your credit score and report is your overall payment history. As long as you’re current on your payments, you’re helping to improve your score. To make it easier to take care of your car payments without worrying about overdrafting or using money reserved for other parts of your budget, you can set up a savings account specifically for your car payment. Additionally, you should sign up for automatic payments, so you don’t have to worry about forgetting to make a payment. Just make sure the money is in the account before the payment is taken out.
The Status of Your Score While You’re Shopping for a Car
Know that your credit score may take a couple of dings while you’re shopping for a new car. This is because lenders will have to make hard credit inquiries to determine your creditworthiness and the rate of your loan. Because several hard inquiries can deduct several points from your overall score, you want to make sure all hard inquiries are done within a 14-day period. That way, they’ll only count as a single inquiry when FICO calculates your monthly credit score. Make a list of all the lenders you’re interested in doing business with and contact them all within a week to protect your score and speed up the car-buying process.
Your Score in the Long Run
When it comes to your credit score, you’ve got to think long-term to reach and maintain your goals. You may wonder if it’s worth getting a three-year loan or a five-year loan to make the most of the credit history aspect of your credit score. The answer to that question is best determined by your financial capabilities. While it’s understandable that you want to pay off debts as soon as possible, you may not be in a financial position to accept a three-year loan, which is likely to have higher monthly payments than a five-year or longer loan.
Paying off your loan is sure to impact the payment history portion of your credit score, but bear in mind that paying off your car also lowers the amount of credit you’re using, which also boosts your score. That said, you don’t want to offset the gains you’ve made by using more of your balance on your credit cards or other forms of credit.
Maybe you’re still worried that paying off your car will eliminate it as one of the installment loans that make up your score. That may be true, but you’ll also be freeing up money to apply elsewhere, such as retirement, savings or taking care of other debts. Even though you may wish you had a better score, you could have a buffer emergency fund as a result.
Enjoying a new car could also double as a way to enjoy a better credit score. Put these tips to good use, and do everything you can to take excellent care of your car as well as your credit score.