January 21st, 2011

Building Credit with an Auto Loan or Car Payment

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build credit car

**Today’s guest post is contributed by MoneyAisle**.

Whether you’re working on improving your credit health after a bankruptcy or just getting started as a borrower, making car payments on an auto loan is an excellent way to establish or build your credit score.

Before you take out that big home mortgage loan, business loan or finance that designer furniture set, you need to prove to lenders that you’re creditworthy.

Car loans help you do just that for the following reasons.

Auto Loans are Installment Loans

When lenders and credit reporting bureaus look at your credit history, they want to see a good mix of installment loans and revolving credit. Revolving loans include credit cards and home equity loans. Installment loans include student loans, mortgages and auto loans. In most cases, it’s not feasible (or wise) to take out a student loan, home mortgage or home equity loan simply to build your credit. It’s much easier to qualify for and pay off an auto loan, which makes it the best option for improving your credit health.

Auto Loan Refinances are Easy

As a borrower with no credit history or bad credit, you’ll pay a premium for your first car loan. Don’t be surprised if you’re hit with a double digit car loan interest rate, especially if you’re emerging from bankruptcy. But the good news is that after one or two years of making your payments on time, you can refinance for a lower interest rate if your credit score has improved (which it will have, if you haven’t done anything else to negatively impact it).

You can refinance every few years and continue to get lower interest rates until you’re no longer paying the subprime rate. This is all made possible because, unlike home mortgage loans, the origination fees and other closing costs of a car loan are typically very low and the payback period is relatively short.

Car Payments are Somewhat Flexible

As long as you avoid loans with early payment penalties, car payments are very flexible. If you get a low monthly car payment, you can elect to make extra payments or double payments whenever you have extra cash. Paying off your loan early not only saves you money on interest, it reportedly boots your credit score faster as well.

You can also put down a larger down payment from the beginning or when you refinance to get a lower interest rate.

Overall, having an installment loan in good standing on your credit history is important to establishing or improving your credit health. A car loan is one of the easiest, most affordable and most flexible installment loans you can get. Keep this in mind as you embark on the road back to good credit.

MoneyAisle.com runs live, reverse auctions (like a reverse e‐Bay) for consumers shopping for financial products—featuring car loan refinance. Consumers get exclusive rates and instant one stop shopping in a fun, dynamic auction format, and banks and Credit Unions get inexpensive access to new customers, accounts, and loans.

Disclaimer: All information posted to this site was accurate at the time of its initial publication. Efforts have been made to keep the content up to date and accurate. However, Credit Karma does not make any guarantees about the accuracy or completeness of the information provided. For complete details of any products mentioned, visit bank or issuer website.

20 Comments

  1. How can my credit score drop so fast? After financing a car last feb, making all 11 payments on time my score has now dropped to a 559. My credit karma report card gives me all A’s and one F ( hard inquiries )from financing my car, last Feb… Credit card offers are pouring in and getting better.. Beginning to think this credit karma site is not all that accurate..

    Starting score 619 2/2010
    11 on time car payments with zero hard inquiries..
    559. 1/2011???

    Thoughts ?

    Confused at 10:35 am on January 25, 2011
  2. It takes 3 years for the hard inquires to drop off. Sounds like you are doing everything right. Don’t be so focused on the number. If you have something major to buy make sure that they read the whole report and not just look at your score. My score dropped in June when I financed my car. You will be surprised at how fast it rises when the hard inquiries drop off.

    Della at 4:41 am on January 30, 2011
  3. Nicely written and well projected Article i have shared it on my twitter profile

    adamsmith at 11:29 pm on February 9, 2012
  4. Is there a way for me to get a car loan with a reputable company with a poor credit score 594. It’s slowly coming up in the last couple of months thanks to this site. I just don’t know if I am wasting my time trying. Does anyone know of reliable resource for me to use.

    Jim at 8:25 am on May 16, 2012
  5. Hi, Jim! I suggest consulting our Credit Advice Center. Many of our members have gone through similar situations, and can help you figure out what steps to take to find a loan that fits your circumstances.

    bethy at 9:46 am on May 22, 2012
  6. I have a friend who chose to take auto loan even though he already have enough savings to buy a car in cash. But he said that, it is a great way to build up his credit score, in preparation for his plan to have a mortgage. I understand now completely why he took that choice because of your post.

    charie101 at 2:23 am on July 27, 2012
  7. It’s been good, and I find that it is accurate. I like how it explains to you on different scoring and what it mean. The other sites are good too, but doesn’t go into details as this one. This one to me make sense, a real breakdown of what is what.

    etinge2 at 5:07 pm on September 26, 2012
  8. Good tip, a lot of people don’t realize the positive effect of having paid back loans on your credit rating.

    car finance at 12:12 am on October 12, 2012
  9. Thank you very much for advising the way of how to increase credit through auto loan or car finance. I will eagerly look forward for more stunning and informative post from you.

    Auto Finance Leads at 9:27 pm on December 1, 2012
  10. Original but very correct point of view. You understand about what you are writing. I like your style of writing and layout on your blog. I am waiting for even more things about it. Thanks for excellent job!

    Colin Wiederholt at 9:17 pm on April 9, 2013
  11. Superb post however , I was wanting to know if you could write a litte more on this topic? I’d be very thankful if you could elaborate a little bit further. Many thanks!

    about the company at 6:58 pm on April 18, 2013
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    loans at 3:19 am on May 22, 2013
  13. I am wondering how much or if at all I can expect my credit score to improve after making 12 on-time payments for my car?

    Kat at 9:07 am on July 24, 2013
  14. Awesome article! For me, it was just a matter of disputing the negative items on my credit and cleaning my credit up. Buying a car after this was so much less of a hassle. Thanks for being here!

    Alex at 9:15 am on August 20, 2013
  15. How many car payments do I need to make in order to build credit , before paying the loan off.

    Jason at 5:40 pm on September 3, 2013
  16. Wonderful site. A lot of useful information
    here. I am sending it to some pals ans also sharing
    in delicious. And of course, thank you to your effort!

    Marisol at 1:17 pm on November 14, 2013
  17. I think this is the best post ever i read about the Auto loan.You really cover all the points in this post.

    Jolie Cameron at 2:54 am on November 27, 2013
  18. Thank you very much for sharing ‘how to increase credit through auto loan or car finance’…like it !

    Johan Fourie at 9:03 pm on December 15, 2013
  19. I have a question: we have enough to pay for a car in cash, but would like to continue to build already good credit (780s-790s right now). Is there a minimum amount of time the loan needs to exist before it will positively affect our scores? Or can we take out the loan, pay it all back the next month, and still reap the benefits of having taken out another non-revolving form of credit (right now we have our mortgage and a single $2k student loan each paid off as non-revolving forms of credit on our history, but nothing else because we never took out loans for our current vehicles)? I hate to waste money paying the interest if we don’t need to and it’s pretty hard for us to get loans at all because our income is so low ($23k) they never believe we live frugally enough to be able to afford the payments. Thank you if you get around to replying to this, I know it’s been a while since anyone’s commented on the article!

    Ashley at 3:12 pm on July 1, 2014
  20. Mike

    Hi Ashley – That’s a great question. I’d recommend checking out our Credit Advice center to find an answer. It looks like this post would be a great place to start: https://www.creditkarma.com/question/if-i-pay-off-my-car-loan-entirely-will-this-help-my-credit-rating

    Thanks!

    Mike at 8:57 am on July 2, 2014

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