Car Loans Help Build Credit – True or False?
Your credit scores reflect the interplay of several factors including but not limited to credit utilization ratio, credit mix, length of credit history, and type of credit. This article examines whether acquiring an auto loan financing can indeed help improve one’s credit score.
Credit Report and Credit Score
A lot of people still confuse credit report from credit score and vice versa.
A credit report is a detailed documentation of your credit made by three authorized credit bureaus namely, Experian, Equifax and TransUnion. The said bureaus are the ones responsible in making a summary of your overall credit acquisition that will be used in determining your credit score.
Meanwhile, a credit score is a 3-digit numerical value that reflects your creditworthiness as an individual. This information is derived from your credit report which is usually given by FICO and it ranges from 300 to 900, with 900 being the highest possible score.
Think of your credit report and score as school report card and marks you got respectively. Both show how well you did in school but one gives you a general idea while the other gives you definitive ones in relation to prescribed standards of performance. A credit report will show is like a report card since it gives you an overall view of how fulfilled your debt obligations. On the other hand, a credit score gives you a numerical value of how well you behaved compared to other borrowers.
If you have an exceptional credit report, it is very likely that you will also have a high credit score. But if your credit report has a lot of missed or late payments, then it will not bode well for your credit score too. Click Here, to get your free annual credit report tips.
How it Looks on your Credit Report
A car loan is essentially an installment type of credit. Since part of your credit score is derived from the type of credit used, acquiring a car loan can either make or break your credit.
Having different types of credit can be good for your credit score but only if you don’t fall behind on your monthly obligations. If you pay your dues promptly, it will reflect on your credit report thereby increasing your credit score. Conversely, failing to pay on time will decrease your credit score. It is worth noting that payment history plays a huge role in determining your credit score that is why you must always be on top of your monthly payments.
Applying from Multiple Lenders
It is generally recommended to shop around and compare interest rates from different lenders; however, it is not good to submit multiple applications from different lenders at the same time. Doing so will cause multiple lenders to do credit checks which are hard inquiries on your credit. Hard inquiries are inquiries that involve a lender evaluating or reviewing your credit which can impact your credit score. On the other hand, soft inquiries such as, securing a copy of your credit score, will not affect your credit since your credit is not being reviewed by a lender.
If you are rate shopping, make sure to keep it under 30 days. FICO considers all hard inquiries as a single inquiry when kept under this given period of time. This way, you can compare your options from different lending institutions without taking the risk of shaving some points off your credit score.
Impact on my Credit
As with any type of credit, acquiring a car loan can really help strengthen your credit but it would largely depend on your part as a borrower. As mentioned earlier, making consistent on-time payments will definitely boost up your credit score while missing a lot of deadlines will accomplish the opposite. A car loan is a huge debt and successfully paying it off will certainly have a huge positive effect on your credit.
If you want to establish a strong credit, get your auto loan from New Car Canada. We have the cheapest auto loan rates available to anyone in need of car financing. We provide instant approvals even to those who have bad credit. We also have a debt reconsolidation program that allows bad credit borrowers to improve their credit scores in the process of paying off their car loans. Fill out our short online application form today and know your options. Application is 100% FREE with no obligation to accept or buy any offer you receive.
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