Clients often ask me, “Can a car loan help improve my credit rating?” The answer is, Yes and No. There are many factors and ways to improve your credit score. Each way to improve your score comes down to financial management and being responsible for paying your debts when they are due.
It also helps to keep your credit cards at moderate levels and pay them on time. If all your cards are maxed out and you are paying only the minimum amounts each month, then you aren’t managing your debt very well.
Improving Your Credit Rating
Auto loans are reported to the credit bureaus, so they do help to improve your credit rating when you pay them as agreed.
However, a car loan can not fix bad credit all by itself. If you pay your car loan on time, but max out your credit limits and miss payments, your score will go down because your credit rating is based on your entire financial picture.
The largest credit score company, FICO, explains that an auto loan can improve your credit score if handled responsibly, regardless if you have had bad credit in the past. The score on your credit is based mostly on payment history.
Credit cards are the most popular means to rate your that score, because they are revolving lines of credit and usual easy to get. A car loan is an installment loan and takes a little more to qualify for. Lenders usually like to see a mix of these accounts on your credit report, because it shows them how well you manage your finances.
CAUTION:
Always pay your bills on time. It doesn’t matter if it is a car loan, a mortgage, your credit cards or any other type of loan. Your credit plays an important part in your life. It can affect you renting an apartment, getting a car loan, the rate you pay for insurance and on and on. Your credit score is very important in life to getting the things you want.
Mishandling a car loan is very serious when it comes to your credit rating. Being late on your payments will not only hurt your credit score, it could cause you to lose your car through a repossession. Your car could be taken from you right off your private property when you least expect it. Having your car repossessed really damages your credit score and can stay on your credit report records for seven years.
Final note…
Make your car payments on time, along with all your other payments to maintain an excellent credit rating.
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