Auto Loans to Improve Credit Scores

Making auto loans and paying them will allow you to keep that car or truck that you just bought. But for those who need more of an incentive to be on time with auto loan payments, having a good track record on your auto loan will also help you improve your credit score. There are three national credit agencies that report your credit history to lenders and other parties, namely Experian, Equifax and Transunion. The Fair Isaac Company (FICO) compiles your credit score or “fico rating.” Making your auto loan payments is a great way to improve your FICO score and get better interest rates on future loans. Below are some tips to help you make the most of this strategy.

Ask Your Lender about Credit Reporting

This might seem like a no-brainer, but in some cases, your lender might have restrictions on the way they report your auto loan. This is especially true if you are buying from a small dealer or other informal lender who may handle financing on their own. You need to ensure that your auto loan payment history goes to the above agencies to help you build your credit. If they do not, ask for the process that will make them do so, or choose a lender who will. You might also want to consider vehicle loans from a credit union, as they mostly offer the best auto loan rates.

Take a Look at Your Credit Timeline

There are some auto loans that will be reported but will not raise your credit score immediately. Today, vendors are offering some riskier types of auto loans, like long term goals and no money down financing, which can actually lower your credit score initially but often balances out as the repayment history matures. As you slowly pay them off successfully, your credit should rebound, but it is a good idea to research the exact timeline so you know just how the loan will affect your credit at any given time.

Consider Your Refinancing Strategy

Making your payments on time on your auto loan should build up to a critical mass point where your current loan history will make your eligible for refinancing or loan consolidation solutions. Refinancing your auto loan allows you to lower your interest rate if another lender offers to buy your debt. The lender will see your current on-time payments as proof of ability to pay which lowers your overall credit risk and ultimately leads to credit score improvement.

Consider Down Payments Benefits

Another way to make loan payment strategies work for you is to look into the special combination that arises from choosing the best buying strategy. This means that, even though getting an auto loan may eventually increase your credit score, it is not a reason to invest in significant financing if you can make a large down payment. Ultimately, debt is good for the lender, as the borrower will pay so much interest over time. If you do not need auto financing, think about all the potential benefits of avoiding auto loan and paying cash, or making a big down payment and refinancing a smaller amount of your car’s worth.

All of the strategies above can help you realize the maximum benefit from the debt that you have taken on. Keep in mind, though, that an auto loan is a financial responsibility, and is something that you need to work into your household or personal budget. This includes pertinent sacrifices, along with some startling risks. Make sure that you research your auto loan thoroughly for the best chance at getting more of the good and less of the bad.