Breaking the Bad Credit Cycle With a Car Loan

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Even with poor credit.

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - October 15, 2020

Your ability to get a car loan may be the furthest thing from your mind if you're dealing with bad credit. But, if you find yourself needing another vehicle, a bad credit auto loan may be within your reach. And, it may help you break the cycle that's keeping your credit down.

5 Ways to Build Credit

No matter which type of bad credit you have, situational or habitual, you can break the cycle of bad credit by taking a few simple steps to keep moving forward. Credit is an ever-changing thing, and it can go up or down frequently, depending on how you treat it.

If you want to take some steps to clean up your credit, try a few of the following five tips to improve your credit and increase your changes of getting a car loan:

  1. Make all your payments on time – Payment history makes up the biggest chunk of your credit score, so making all your payments on time goes a long way toward credit improvement. Keeping up with payments is the simplest step that can make a big impact. If you're having trouble doing this, talk to your lenders, credit card companies, or utility companies to see if there are steps you can take to get on track. Sometimes, you may be surprised by the options available, such as moving a billing or payment due date, or rebate programs you could qualify for. You won't know unless you ask.
  2. Keep your credit usage low – A good rule of thumb: only purchase on your credit cards what you can afford to pay for with cash. Your credit score is negatively affected when you're using a high percentage of your available credit limits on credit cards. It's recommended to keep your credit card balances at least below 30% of their limits at any given time – no maxing out your card and only making minimum due payments.
  3. Keep older credit accounts open and in good standing – Not only is it a good idea to keep a few accounts open, it's also smart to keep them open for as long as possible. The longer your credit history, the more stable you can appear to a lender when getting an auto loan.
  4. If you have to apply for credit, do it thoughtfully – When you need credit or an installment loan, try to rate shop for the best fit. There's a standard rate shopping window, typically 14 days, in which you can apply for the same type of credit with multiple lenders. By keeping your search to this time frame, inquiries for the same kind of credit are grouped together. They all appear on your credit reports, but your credit score only takes the hit for one hard inquiry.
  5. Keep up with your own credit – It's always a good idea to go into a car loan, or any form or credit application, knowing where you stand. If you don't know your credit score or what's on your credit reports, you've lost your ability to negotiate based on credit. Keeping track of what's on your credit reports also helps you keep your credit healthy because you can look for and fix accounts which could be dragging down your credit score. Right now is a good time to start seeing what's on your credit if you don't already know; the three major national credit bureaus are offering a free look at your credit reports once a week until April 2021. You can get yours by visiting www.annualcreditreport.com, or signing up for a credit monitoring service.

How Bad Credit Can Happen

If your credit score is suffering, it’s time to break the cycle. Bad credit can lead to higher interest rates, or trouble getting approved for new credit – which can be a hassle if you need a big purchase like a vehicle.

There are five main areas that go into your FICO credit score. These are reflected on your credit reports, and can be seen by lenders when you apply for credit. An auto loan impacts all five areas that comprise your credit score, which are:

  • Payment history – This makes up 35% of your credit score. The more on time payments you make, and the more accounts you keep in good standing, the better off your credit score can be.
  • Amounts owed – What you owe across all of your credit accounts is the next largest FICO score factor at 30%. Lenders are less likely to approve you for a car loan if you're already dedicated to too many lines of credit or using too much of your available credit limits on credit cards.
  • Length of credit history – The longer you can keep an account open and in good standing, the better it reflects on your credit history, which makes up 15% of your credit score.
  • Credit mix – Having a good mix of installment loans, such as an auto loan or a mortgage, and revolving credit, like credit cards, makes up 10% of your credit score.
  • New credit – Applying for new credit responsibly also makes up 10% of your score.

Now that you know what factors make up your credit score, it's time to look at how a car loan can actually improve it.

How Can a Car Loan Help Improve Your Credit?

An auto loan can improve your credit score by contributing to many areas of your financial life that impact it, such as responsible borrowing, long-term payments, taking on new credit, and your credit mix.

Your credit score is a three-digit number used by lenders to assess how responsible you are and have been in your financial life. The most common score used by lenders is the FICO score, which ranges from 300 to 850. The higher your credit score is, the more opportunities you typically qualify for as a borrower.

However, just because you have a lower credit score doesn't mean you're out of the running for a car loan. There are many lenders across the country that finance credit-challenged consumers.

Better Credit Could Be Around the Corner

Another easy step you can take to get on your way toward breaking the bad credit cycle is to get an auto loan. A car loan isn't out of reach when you have poor credit if you're working with the right type of lender. Subprime lenders are prepared to assist borrowers in many types of bad credit situations, both situational and habitual.

They also know that you're more than just a credit score, and look at additional factors to get you into the auto loan you need. At CarsDirect, we want to help you take the first step by matching you to a local dealership. We've gathered a nationwide network of special finance dealers that are signed up with the lenders you're looking for.

The process is simple, fast, and free. To get started, fill out our car loan request form now!

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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