Improving your credit with a car loan isn’t just possible, it’s one of the most effective strategies available. However, it is by no means a guarantee. Car loans can be very beneficial to your credit score, but only if you handle them properly.
Here’s the good news: with the right guidance it’s incredible easy to do.
Here’s the better news: we’ll tell you everything you need to know in the next three minutes.
Improving your credit score with a car loan isn’t as hard as some people make it out to be. It’s simply about choosing the right vehicle and being realistic about your budget. It’s seriously that easy.
People with credit issues are typically carrying a fair amount of debt, so the idea of taking on a car loan—or, more debt—seems like a bad idea. For some people, it is. But that’s because they buy the wrong vehicles that require monthly payments they can’t afford.
The only way a car loan is going help your credit score is if you make your payments every single month. Once you start missing your payments and defaulting on your loan then the loan becomes a problem, credit-wise. Anyone who complains about car loans not being good for your credit is saying this because they couldn’t afford their payments.
The solution, then, is simple: take out a car loan you can actually afford.
There are three simple steps to improving your credit score with a car loan:
1. Set a Realistic Budget
Here’s the honest truth: if you have a hard time affording a car loan, then getting one is not a good idea.
Rebuilding your credit with a car loan is only a sound decision if you’re making payments on time. So before you do anything, make sure you figure out how much money you can afford every month; not how much money you can “theoretically” afford, but how much can pay every month without complicating your finances.
In other words, set a realistic budget.
If you find that you can’t afford to take on a car loan, you should focus on paying down some existing debts that you have. We don’t want you to take on a car loan just so it can get in the way of the credit card you’re also trying to pay off. We’re trying to help you, here!
We suggest putting no more than 15% of your monthly take-home earnings towards your car loan. So if you make $1500 a month after taxes, then you can probably afford to spend $225 a month on car payments. But that’s just a general rule of thumb. Work out what you think you can afford, and stick to it.
2. Choose the Right Vehicle for Your Budget
Setting your budget is an important first step because it lets you figure out which vehicles are right for your situation.
If, like in the above example, you can afford $225 a month on car payments, then don’t even consider a vehicle that costs more than that. Make a budget and stick to it, no matter how much you want the vehicle with the leather seats and Bose sound system. If it doesn’t make sense for your situation, then do yourself a favor and avoid it.
If you choose a vehicle that’s too expensive for your budget, then there’s a greater chance of you missing your payments, and then your credit score will get worse, not better.
This is one of the reasons we have Personal Shoppers available at My Ride. They’ll work with your budget and find the vehicles that make sense for you, without you having to do the shopping yourself. Not only does it make your job easier, but it also eliminates any temptations that might come up.
3. Make Your Payments on Time Every Month
Setting a realistic budget and picking the right vehicle are important first steps because they set the stage for step three: making your payments on time.
This is the most important step, by far. When you make your payments on time, your credit improves. When you miss payments, your credit score goes down.
It’s that simple.
Within six months of on-time auto payments, your credit score can start to improve (as long as you’re not missing other debt payments during this time).
If you are able to pay off your car loan early, we’re going to advise you not to do that. Even though that sounds like a smart financial decision, the longer you are making consistent payments the more likely a lender is going to look favourably on your credit report.
Paying off a 48-month car loan in 20 months isn’t going to help you nearly as much as you’d think. Credit bureaus consider you more financially responsible if you pay off your 48-month loan in 48 months.
You’re probably not going to solve your credit issues with a five-minute blog post. We realize that. That’s why we have free, no-obligation consultations available.
In no time, you’ll know where you are financially and what you have to do next to achieve your goals. We’re here whenever you’re ready to get the conversation started!