Can a Car Loan Repair My Credit?

Get Car Financing
Even with poor credit.

By

Automotive Content Editor

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.


, Automotive Content Editor - June 28, 2021

Yes! A car loan is a wonderful way to begin repairing your credit, but it can't work its magic alone. We've got a few pointers if you're looking for another vehicle and hoping to improve your credit score, too.

Cars Loans Can Boost Credit

Auto loans can boost your credit score because they impact all five factors that make up your credit reports, which is what your credit score is based on. In the FICO credit scoring model (the most commonly used among auto lenders) each of these factors carries a different weight and the result is a three-digit number between 300 and 850.

The five factors on your credit reports are payment history, amounts owed, length of credit history, new credit, and credit mix. Payment history is the most prominent factor, making up 35% of your credit score.

Car loans are an excellent way to boost your payment history since they're typically around 48 to 96 months (four to eight years). Making all your auto loan payments on time for the duration of your loan can go farther than almost anything else toward repairing your credit – assuming you're keeping up with all your other bills and obligations, too.

Making the Most of Your Car Loan

If you want to get the most bang for your buck, you don't need to stretch your auto loan out to maximize your repayment history. A completed loan without any missteps looks great on your credit history and proves to future lenders that you can repay credit successfully.

Stretching your car loan out too long can end up leaving you with negative equity for longer than necessary, and can cost you more in interest charges. Additionally, the longer you have the loan, the higher the chances of something going amiss – the shorter the loan, the less chance you're stuck with a loan for a vehicle that no longer runs.

To make the most of your car loan for credit building, opt for an affordable vehicle with the highest monthly payment you can comfortably afford for the shortest time possible.

Improving Your Credit Before Taking on a Car Loan

Credit repair can start before you decide to take on an auto loan, and keeping up some basic good credit habits can extend your credit-building powers well beyond the life of your car loan.

You can get started building your credit at any time with these tips:

Start with a credit-builder loan if you're new to credit. These loans typically come from credit unions and banks and are designed to help borrowers with thin credit files build a positive payment history. These loans are set aside in a savings account for you once granted, and once you make all the payments, with interest, you get the money. Credit-builder loans are for small amounts, usually $1,000 or less, and have short loan terms that typically range from six to 24 months.

Make all your payments on time. The more obligations you can pay in full every month, the better since payment history makes up the largest chunk of your credit score. If making a full payment on all your bills isn't budget-friendly, try making two half-payments a month on your obligations, such as utilities and loan payments; one a few weeks before your payment is due, and one on or by the due date.

Keep your credit card balances low. The total amount you owe over all your accounts also makes up a large portion of your credit score, and a good way to control this is by keeping your revolving credit (credit card) balances low. If you only make the minimum payment each month you can accumulate a lot of interest charges, which can make it hard to completely pay off your cards. A good tip is to only use your credit cards to pay for things you can already afford and pay the balance in full each month. FICO recommends keeping credit card balances below 30% of their limits.

Work what you're already paying with a credit boost. Many of the accounts you already pay can be used as positive payment history when they're reported to the credit bureaus. Rent, utilities, and even streaming services such as Netflix and Hulu can give your score a boost. You can ask what the reporting practices are for your lenders, or use a service like Experian Boost to help get these reported and help your credit.

Be wise about taking on new lines of credit. Even though new credit only accounts for 10% of your credit score, taking on too many lines of credit at once, or applying for every opportunity for credit that comes your way can be seen as red flags by many lenders. To help build your credit score take on lines of credit only when necessary, and only take on loans or credit cards that you can afford to continue paying for.

Clean up your credit reports. Sometimes all it takes to begin building a better credit score is paying attention to what's on your credit reports. Negative accounts and missed payments, as well as larger negative marks like a vehicle repossession or bankruptcy, stay on your credit reports for seven years (or more) but lose their potency over time. Sometimes these accounts fail to fall off your report or aren't reported as closed once you've paid off a debt. Monitoring your credit reports can help you catch these and alert the reporting agency.

Ready to Find Your Next Auto Loan?

Once you're confident it's time to take on an auto loan and build your credit, CarsDirect is here for you. We can aid in your research efforts with our buying guides, reviews, and previews, help you find a vehicle in your area with our new and used car pages, and even help you find a special finance dealership to start shopping with.

Over the last two decades, we've built a nationwide network of special finance dealerships that are signed up with subprime lenders that can work with credit-challenged consumers. Whether you're just starting to build your credit score, or you're repairing it after an unforeseen hardship, a car loan can help and we want to get you started. Just fill out our fast, free, no-obligation auto loan request form to take the first step.

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, Automotive Content Editor

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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