How does a car loan build credit? This is a good question. A car loan, some will say, is the fastest way to build credit. Do I agree with this? I do agree with this for the most part, but a car loan by itself will not build credit to the degree that some will need it to. When a person is faced with re-building credit a car loan alongside a secured credit card is the way I would suggest going. Their are many companies that supply secured credit cards, and I will get into that in a later post. The main reason I would suggest a car loan, and a secured credit card at the same time is both will report as different types of credit. A car loan reports as an Installment (I) payment and a secured credit card will report as revolving (R) credit. I believe that both are needed to build a strong credit bureau.In my experience a future lender will look for both on a bureau, in order to make a better decision about granting credit. I believe their will be people out their that have only had one of these types of loans and still had great credit, but I am generally speaking. Having both types of credit will show any future lenders that a person can manage their 2 types of credit, rather than just the one. So, how does a car loan build credit exactly. Well, let me run this past you. You take out a car loan for $10000. This $10000 now reports to your bureau as a $10000 High Credit(HC) and will decrease as you make your installment payments to the lender. As time goes on, and the credit score goes up(if payments aren’t missed), the next lender will look at this on the bureau and recognize that another lender granted $10000 in credit. This next lender will be more open to the idea of lending more money, based on the fact that another lender had no issues with the first loan of $10000. Does this make sense? Now, if you throw a $1000 secured credit card into the arena and run it alongside the car loan this would make the total credit granted $11000. If the $1000 is properly managed, with no missed payment, and the limit not completely utilized then it will give the future lender that much more of a comfort zone when looking to lend more money. So, if you are re-building credit and are taking out a car loan to help with this, I would suggest making 16 payments on that car loan and re-checking your credit to see if you qualify for a lower rate. Some auto loan companies will suggest 1 year of payments on time and come back to re-finance. From my personal experience, I would suggest 16 payment.This will ensure that 12 full payments have reported to the bureau, as sometimes the credit bureaus report a couple months behind.
Does all this make sense? Do you have any questions regarding building credit with car loans?
Just my 2 cents