Looking for good ways to build credit but not sure where to start? An easy, reliable way to help give your credit a boost has always been through a car loan. For starters, it will have an impact of both your credit report and your credit score. In the long haul, paying the loan on time will also help you establish or rebuild your credit, and improve your credit score. Repayment will also improve your eligibility to receive other types of loans, such as a mortgage, personal loan or credit card.
Beginning Stages of an Auto Loan
When you get an auto loan two things happen to your credit. First, it goes down a few points, and then, once you start making payments on the loan, it will go up. Here’s how it works: When applying for a car loan a credit report is run. This is referred to as a hard inquiry. If you are shopping for cars, each dealership you stop at will run a credit check on you. Whenever hard inquiries are made on your credit it shaves a few points off your score. However, there is an upside. The credit bureaus will only show one report of a hard inquiry on a car loan even if several are run of the course of a weekend. Therefore, plan to buy a car. Set aside a few days for your shopping. Even if you go to three or four car dealers and have reports run, those reports should only show up as one on your score.
Once your loan is secured and you have purchased a car, the loss of those points on your score is temporary, that is, if you pay as agreed, each time period on time. The points shaved from your credit score points when you applied for the loan will be more than compensated by the points applied from building a history of on-time payments.
How An Auto Loan Impacts Your Credit
An auto loan appears on your credit report as an installment account. Student loans and mortgages are other examples of installment accounts found on credit reports. This type of loan appears as a fixed payment on your report, which is also part of the report’s credit mix. The more diverse your credit is the better your score. Your credit mix is a determining factor for your overall credit score. A mix of revolving debt like a credit card and installment loans like car loans, a mortgage, or student loans, that are current status or paid off will help your credit profile.
Current status on your credit report will let the lender know if you pay your loans on time. The report will show that your loan status is “current” or “paid as agreed.” The biggest influence on your credit history is your current status. Staying current not only benefits your credit score but improves it significantly. Falling behind on car payments will decrease your credit score. Falling behind by 30 days or more can severely lower your credit score and risk having your car repossessed by your lender.
You Have Your Auto Loan – Now What?
Once you have a car loan it’s important to monitor your credit report annually, if not a couple time a year, to ensure that your accounts are being reported accurately and are correct. Credit bureaus, including the three largest—Experian, Equifax, and TransUnion—are all guilty of misreporting information on your credit reports. Say, if an on-time payment is not posted or posted as late you should file a dispute to have it corrected to improve your score. You should view your credit report before going car shopping, too. Credit reports can be acquired free of charge every 12 months. You can check more often with NerdWallet, which provides free credit reports weekly.
More Good Ways to Build Credit
Finally, establishing or rebuilding credit is a lengthy process that takes discipline. A good first step: Look to improve your credit by getting a credit card. Then, use it instead of cash, and use your cash to pay the credit card off once a month. Monitor your credit report to make sure it is up-to-date. Credit inquiries made when you apply for credit can cost you points on your credit score. While car shopping, be sure to group your applications for any car loans over a few days. Do not shop for a car once a month over several months. Otherwise, credit inquiries will cost you points off your score. Above all, stay current on any loans you may have, whether student loans or personal loans. Paying your bills on time will build your score up over time. In the long run, it will improve your eligibility for a lower interest rate. That will save you money when you apply for a car loan in the future.
There you have it! Finding good ways to build credit doesn’t have to be a challenge. There are a variety of roads you can take when it comes to building your credit – let an auto loan from Auto Action in Arizona be your next move in the right direction. Contact us today to get started!