Does a car loan help your credit? The short answer is yes. The long answer is a little bit more complicated. Before we get into detail about how a car loan specifically factors into your credit situation, it’s important to understand how credit is calculated.
Every adult has both a credit score and a credit report. Your credit score is a 3 digit number (much like a grade on a report card) while your credit report is the report card itself. Both of these things are affected by your credit habits.
If you have credit from a number of different sources and always pay your bills on time and in full, chances are good that you have a pretty great credit score. If you only have one type of credit and either don’t make your payments on time (this is known as slow credit) or don’t make your payments at all (this is known as defaulting) then your credit score is going to be bad.
A good credit score gives you access to better deals, better interest rates, and saves you tons of money in the long run. A bad credit score, on the other hand, can prevent you from being able to get a loan from any reputable lender (which means you’re stuck borrowing money from loan sharks or other subprime lenders with absurdly high interest rates).
So how can a car loan help your credit? It helps you create variety on your credit report (auto loans and mortgage loans are ‘installment loans’ which are considered a different category than credit cards) and, so long as you make your payments on time and in full, can help you prove that you’re responsible and can be trusted to borrow money from other lenders in the future.
It’s also important to understand how the amount of available credit used can affect your score. Much like with credit cards, it’s not about how much you owe it’s about how much you’ve paid off/the proportion of credit used.
If your credit limit is $1500.00 and you’ve already put $1300.00 on your card that’s actually worse for your score than someone with a $12,000.00 limit putting $3000.00 on their card.
By the same token, a smaller auto loan that’s only been 15% paid off is less helpful to your credit score than a much larger auto loan that’s 90% paid off.
Do as much research as possible before committing to a loan, and most importantly, remember to request a copy of your credit report each year! Even one error can negatively affect your score (which will then go on to affect the interest rates and types of loans available to you).
Now that you know that the answer to ‘Does a car loan help your credit’ is a resounding yes, why not fill out our online application here?