Credit Repair

Does a Car Loan Build Credit? 3 Ways to Improve Your Credit Score When You Buy a Car

does a car loan build credit
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Twenty-six million adults in America suffer from being “credit invisible”.

Invisible credit happens when you don’t have any documented credit history. Having invisible credit can be the same as having horrible credit.

You’ll be stuck in an endless cycle of rejection. Rejection for housing opportunities, loans, and even employment prospects.

Having poor credit doesn’t only affect you financially. Did you know that financial stress is also harmful to your health? Worrying about money can cause anxiety, depression and even heart attacks.

Taking action is the best way to overcome your financial fears. There are smart ways to build your credit while also improving your life. For example, have you ever wondered, “Does a car loan build credit?”.

The loud resounding answer is yes, and we would love to show you how. You can have the financial health you’ve always desired. Continue reading to learn the three ways a car loan can help improve your credit score.

Why Does a Car Loan Build Credit

There’s a lot of confusion around why taking out a loan can improve your credit. Many people view taking out a loan as being in debt. Yet, you have to throw away this type of fearful mentality to grow.

Instead of viewing a car loan as debt, see it as an investment. An investment that will provide you with transportation and better credit.

So, why does a car loan build credit? The answer lies in the on-time payments. Your payment history determines about 30 percent of your credit score.

You’re on time payments will prove to lenders that you are financially reliable. Paying on time helps create a positive payment history. Contrarily, delinquent payments will directly damage your credit score.

Credit Report and Credit Score

First, it’s important you understand that your credit score and credit report aren’t the same things.

One good way to tell the two apart is to think of the report card you received in school. Your grades are like your credit score while the report is a summary of your grades.

Credit Score

Your credit score tells companies how reliable you are a borrower. The score itself is a three digit number.

The information compiled in your credit report creates your credit score. Usually, when you have a positive credit report you also have a positive credit score.

Credit Report

A credit report is a detailed document created by three major credit bureaus.

  • TransUnion
  • Experian
  • Equifax

Your credit report will summarize all your monthly payments. The report will give information on both your closed and your open accounts.

The summary also includes any companies who’ve looked at your credit. You’ll also be able to see any court-mandated settlements you owe.

First Know Your Credit Status

Before you rush over to the car dealership, you’ll need to know where you stand. Don’t start shopping for a new car until you know the condition of your credit.

There’s a lot of free websites you can visit to find out your exact credit score within minutes. If you are credit-invisible, prepare for a few small challenges in securing a loan. Lenders are more cautious when creating a loan for a first-time borrower.

But, this doesn’t mean you can’t find a good deal. Without any credit history, lenders may ask you to pay higher interest rates. It helps if you have a large down payment and a co-signer available for your car loan.

A large down payment, coupled with a cosigner, can help you secure the best financing.

How a Loan Appears on Your Credit Report

Credit reports have a lot of information and can be confusing to readers. Trying to read through the entire report will leave you with more questions than answers.

It helps if you know exactly where to look on your credit report for the information you need. First, locate the three reporting agencies (TransUnion, Experian, Equifax) on your report.

Next, locate where each agency lists your car loan. Once you’ve found the listing you can focus your attention on these two categories:

  • Type of account
  • Current Status

Being by looking at the type of account. Usually, your report will list your auto loan will as an installment account.

If you have a mortgage or student loan they will also appear as installment accounts. If you don’t have any installment accounts a car loan will help build your credit profile.

Next, you’ll want to review the account’s current status. It’s vital that your payments are always paid on time and in full. If you are diligent about making prompt payments your status will read as “current” or “paid as agreed”.

Initial Decrease in Credit Score

You may have wondered, “Does buying a car hurt your credit.” There are only two ways a car loan will hurt your credit score. The first is if you make late or delinquent payments.

The other way your score will go down is if you allow an excessive number of hard inquiries or credit checks. After you get your car loan, you may notice a slight decrease in your credit score.

When you’re shopping for a car loan lenders will be running credit checks on you. Usually, any hard inquiries that fall within the same 30 day period can count as one inquiry. Yet, this isn’t the case in all situations.

To be safe you should your car loan shopping to a minimum. Only allow a few agencies to run your credit making your choice.

Paying off Your Loan

Finally, it’s time for you to patiently watch your credit grow. Stay away from the temptation to quickly pay off your car loan early. Paying off your entire car loan will erase the debt on your credit report.

However, you’ll no longer be able to build credit by making on-time payments. Instead, you should wait and continue to make small scheduled payments. Once you’ve paid your loan off in full you’ll need to establish another way to build your credit.

You could take out another loan or start regularly using and paying off credit cards.

Empower Yourself to Grow Financially

Now you know the answer to the question “Why does a car loan build credit?”.

Credit Repair Answers wants to help you with all of your credit questions. We offer free information on everything credit related. Visit our blog today to find more articles related to credit.

You can also contact us today with any questions you may have. Stop stressing over finances and start taking action today.

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