Financial Tip Friday - Building your Credit Score with an Auto Loan
Does a Car Loan Help Build Credit?
Steady, timely payments are the key to building credit with a car loan. Merely opening a car loan typically won't have a big effect on your credit scores, but it could have some minor impacts:
Opening a car loan might cause a small, temporary decline in score in response to the hard inquiries made when you applied for the loan.
On the other hand, accepting a car loan could give your credit scores a small boost, by improving what's known as your credit mix. Lenders value borrowers' ability to manage both installment loans (such as car loans) and revolving credit (such as credit cards), and credit mix is a credit scoring factor that encapsulates that skill. Credit mix accounts for about 10% of your credit score, so your credit scores could increase a bit, especially if your car loan is the only open installment loan on your credit report.
How to Use a Car Loan to Build Credit
The key to building credit with an auto loan, or any other installment loan, is to prove you can and will make your payments on time every month, as spelled out in your loan agreement.
Payment history is the largest single factor that influences credit scores, responsible for about 35% of your score. Regular on-time payments play a big role in promoting credit score improvement, while just one payment that's overdue by 30 days or more (also known as a delinquency) can do significant harm to your scores.
By doing whatever it takes to get your payment in by your monthly due date, you'll tend to see steady improvement in your credit scores.
If remembering to make your payments on time is a concern, here are some tips for making sure you're not late:
Take advantage of technology. There's a good chance your lender's website or app can help you stay on top of your payment deadlines. Most lenders enable you to set up text or email alerts to remind you when payments are due. Many creditors also provide automatic payment options that can transfer funds on the appointed day each month without any additional action on your part. If you go the autopay route, just take care that there are sufficient funds in your checking account so you avoid accidental overdrafts. Thrive members can also take advantage of online Bill Pay through the Thrive app.
Be proactive if payments are in doubt. If you think you might not be able to afford a payment, reach out to your lender immediately—ideally before you miss a deadline—to discuss alternatives. Depending on the situation, you may be able to defer a payment or arrange a temporary forbearance period, during which your payments are temporarily reduced or suspended. Note that in a deferment or forbearance arrangement, you'll be expected to make all payments in full, usually with additional interest charges.
The Bottom Line
An affordable car loan is a great way to finance the vehicle you need, and making regular car payments builds a positive payment history that can put you on the road to a steady credit score improvement. Along the way, Thrive members can track progress by checking their credit score through SavvyMoney.
Originally written by Experian
