If you’re trying to improve your credit score, buying a car might not be the first method you think about. In fact, most people believe that purchasing a new car will impact credit score negatively. However, in most places in the United States, you simply can’t get around without having a vehicle. Buying a car might be necessary for your everyday life, and if you go about it properly, buying a car can actually help to boost your credit score. We’re here to tell you how.
The Initial Setback
Initially, your credit score might see a temporary setback when you first buy a car. For instance, one of the biggest factors in your credit score is your payment history. When you first purchase a car, you haven’t had the chance to establish a payment history for that account, so your credit score may experience a slight dip
Another factor to be wary of are the hard inquiries that lenders will undertake. Hard inquiries are when lenders pull your credit profile to base your approval from. Hard inquiries tend to take around five points off of your score, and if you have multiple hard inquiries within a short period of time, your score can drop even more. It’s important to remember that hard inquiries only affect your credit score for about a year and will eventually fall off of your credit score
Remember: In almost all cases, your credit score will not only rise to its previous level quickly, but as long as you continue to make your payments regularly and on time, your score will rise far beyond where it was when you started.
1. Making Payments on Time Raises Your Credit Score
While there are many different factors that can impact your credit score, your payment history is easily the most important. In fact, payment history makes up a whopping 35% of your overall score! Your lenders want to know that you’ll be able to pay off your loans on time, every time. So, you should be making every effort to make your payments on time after you purchase your car. As you continue to make your payments regularly, your credit score will go up.
2. You’ll Extend the Length of Your Credit History
The length of your credit history makes up 15% of your credit score, making it another significant factor when it comes to raising your score. As we mentioned, when you first purchase your car, this portion of your credit score will go down. Lenders want to see that you can not only stay on time with your payments, but they also want to see that you can keep an account open and in good standing for a long period of time. This benefit does take a bit of time to kick in, but if you can continue to make your payments on time for months or years on end, you’ll extend the length of your credit history and continue to raise your score for years to come.
3. You’ll Add a New Credit to Your Report
Lenders will also examine the types of credit on your credit score, which makes up 10% of your overall report. In this case, lenders want to see that you can be responsible with several different kinds of credit, including credit cards, installment loans, and the like. Installment loans, which is the category that car payments fall into, are good measurements of whether or not you are able to manage your debt and repay it properly. Again, as you continue to pay on your car regularly, this portion of your credit report will steadily improve.
More Tips to Improve Your Credit Score
As you’re using your car payments to improve your credit score, there are other steps you can take to keep that number climbing. First, keep your credit cards open and make sure that you are making those payments on time as well. We’ve already mentioned that car loans are considered installment loans, but credit cards are what’s known as “revolving credit.” Having healthy revolving credit lets lenders know that you can effectively manage your cash flow, and being responsible with both your revolving credit and your installment loans is the key to raising your credit score.
If you do think that you’re going to miss a payment, reach out to your lender as early as possible. Making your payments late, or skipping them altogether, can result in additional interest on your balances, skyrocketing penalty fees, and a huge dip in your credit score. Often, as long as you reach out early, lenders can help you come up with a payment plan or offer alternate solutions so you don’t fall behind.
Secure Convenient Auto Loans with FA Financing
No matter your current credit score or financial situation, FA Financing can help you get the auto loans you need to purchase a car and start rebuilding your credit score. We have more than 20 years of experience in subprime auto lending in San Diego and we’re happy to support first-time buyers in the area. We can work alongside you to highlight the strengths of your credit application and make it more appealing to lenders, helping you gain the best chance of approval.
At FA Financing, we know that you’re more than your credit score. We offer an entire portfolio to potential lenders, not just your credit report, to give you a shot not only at approval but also better terms for your loan. We are dedicated to setting you up for success and helping you get started on your path to a better financial future. For more information about getting help with your next auto loan, contact FA Financing today!
