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Car Loans Can Help Your Credit

Mar 17, 2014

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 interes 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. So we know that a high credit score can not only save you money in financing charges, but it can also help determine your eligibility for a job or an apartment lease, but how do we make sure that this score is as high as possible? To figure out how to improve your credit score, we first have to study what a credit score is, and how it is determined.

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%). From looking at the criteria that make up a score and their relative weighting, we can infer that a good score will be earned primarily through a good 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 such as car loans and mortgages rather than on “bad” credit such as 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. But a car loan can also be a good step towards repairing a credit score that is not as high as you would like. Because payment history is the most heavily weighted category at 35% of the total score, and 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.
According to Craig Watts, consumer affairs manager for Fair Isaac Corp. “The mantra for getting a great score is pay your bills on time, keep account balances low, and take out new credit only when you need it.” He adds, “People who do that faithfully have very high scores. It usually means you’re being conservative and cautious about credit. It’s not a toy and it shouldn’t be a hobby.” The longer you pay your bills on time after being late, the more your FICO score should increase. Older credit problems count for less, so poor credit performance won’t haunt you forever. The impact of past credit problems on your FICO score fades as time passes and as recent good payment patterns show up on your credit report. And good FICO scores weigh any credit problems against the positive information that says you’re managing your credit well. A strong credit score is a necessity, and an excellent way to obtain and maintain one is with a car loan.