Can buying a car help you rebuild your credit? Yes. That being said, it’s important to understand that getting a car is just one step in a longer process towards living a debt free life. Unfortunately, if you already have bad credit, the mere thought of getting a car loan might seem impossible. In order to understand how you can get a bad credit car loan, you need to understand how your credit score and rating are calculated in the first place.
How is Your Credit Score Calculated?
Your credit score is calculated using a variety of factors:
- your payment history (whether you pay on time and in full or if you just make the minimum payment each month or fail to pay at all)
- your debt utilization (how much of your available credit you actually use each month – surprisingly the more you use [even if you pay it off right away], the worse it looks on your credit report)
- the length of time you’ve had credit available to you (the longer you’ve had open accounts and the more responsibly you’ve used said accounts, the better)
- recent inquiries (to learn more about the difference between a soft and a hard inquiry click here)
- credit diversity (the more variety in the types of credit you use/have available to you, the better)
How Does Buying a Used Car Help?
Credit diversity is the main point to focus on where a bad credit car loan is concerned because it falls under the category of installment loan. An installment loan is any kind of loan you make regular payments towards (monthly/bi-weekly etc). A mortgage and a student loan are two other common examples of installment loans.
A credit card, on the other hand, is an example of revolving credit. The amount of money you charge to your card varies month to month and you can choose to pay it all off right away without penalty.
The best way to achieve and maintain a good credit score is by having a mix of installment loans and revolving credit.
Unfortunately, if you have bad credit, it can be tough to get a bank to trust you with either of these kinds of loans. Which is where buying a used car and getting a bad credit car loan comes in.
We can help you get a reasonable car loan within your budget to help you show your bank that you are responsible enough to be trusted with their money. So long as you continue to make your car payments in full and on time, your credit score will rise. We can also help you get a credit card so you can show your bank that you are able to manage and handle installment and revolving credit at the same time (which will also help increase your credit score).
Want to learn more about how we can help you? Check out our ‘apply online’ page right here!