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How to Rebuild Your Credit Score

Jun 17, 2016

It is important to maintain a good credit score. A high credit score gets you access to the lowest financing rates, meaning that you will pay less in interest when you borrow money to finance the purchase of something like a car or home. Additionally, many employers (and even some landlords) pull credit checks on applicants to determine if a prospective employee or renter pays his or her bills on time. But sometimes, life events happen that can lower your credit score. Maybe you lost your job for a time, maybe the mortgage crisis struck too close (literally) to home, or maybe you just fell behind on a few payments due to an emergency or medical crisis. If these things happened to you then your credit score almost certainly a hit.

If you are looking to rebuild your credit, a car loan is an excellent way to do so. The standard unit of determining credit worthiness is called a FICO score, which is named after Fair Isaacs and Company, the firm that pioneered this scoring process. Your credit score changes over time, and moves up and down based on factors such as opening up new lines of credit, paying off older accounts, and so forth. According to Fair Isaacs and Company’s website, a FICO score is based on 5 factors with different weighting: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%).

By examining the criteria that make up a score and their relative weighting, we can infer that a good score will be earned primarily through a history of making payments on time, on accounts that have been open for a long period of time, and with outstanding balance on “good” credit (e.g. car loans and mortgages) rather than on “bad” credit (e.g. credit cards). This shows that taking out a loan to buy a car, and making payments on time will make a good score even better. Moreover, it shows that a car loan can also be a good step towards repairing a credit score that is not as high as you would like. Since payment history is the most heavily weighted category (35% of the total score) and a car loan is also one of the “good” types of credit used, taking out a car loan and making timely payments can begin to repair a credit score quickly.