Best way to improve credit with car loan?

June 1, 2009 6:48 AM

Best way to improve credit with car loan?

My current credit score is sub-par due to carelessness with credit cards when I was in college. I'm about to purchase a car for the very first time and is looking into financing it to help improve my credit score. The car costs $37k and I plan on putting down $15k, finance the rest off a 60 month term, and then paying everything off by the end of the 12th month to minimize interest.

As I mention earlier my credit is bad and I got approved for 9.5%, which is completely fine since I'll be paying the entire thing off after the 12 month. What I want to know is if 12 months is long enough to have a positive effect on my credit. I was told that 10 months is enough but I want to do a whole year to be safe. Another thing I would like to ask is whether it will help improve my credit if I increase my loan amount by decreasing the down payment to $10k only.

My current score is 660, after I pay off the car loan, can I expect a significant bump in my credit score? After I pay off my car loan and hopefully increase my credit score, I plan on getting a personal loan to mix up my loan portfolio. Will that improve my credit also?

posted by willy_dilly to work & money (11 answers total)

I don't know if you want to just start taking out large amounts of debt just in an effort to increase your credit score.

37K for a car seems crazy to me. And I know that's not your question. However, please don't necessarily equate large amounts of debt with a quicker way to increase your credit worthiness or repair credit. A 15k car payment, paid off quickly, would probably yield the same end results. Taking on that debt, in actuality, is going to ding your credit I think.

There is no magic way to cure your credit score. It takes time, it takes effort and it takes responsibility. Pay your bills on time, every month. Don't be late, don't take on a lot of debt to available credit, don't get over your head.

Also please consider that paying off 22k with a big interest rate like that over 12 months is going to be at least a $2000 a month car payment. If the shit hits the fan, and I think this year alone we've all seen the shit hitting the fan pretty hard, is that going to cripple you? Is it going to drain reserves you have? I know that's not at all part of your question, but that was the first thing that came to mind.
posted by jerseygirl at 7:36 AM on June 1, 2009

Establishing a large new line of credit may cause your score to drop in the short term. Payment history makes up 35% of your credit score. This move will improve that eventually, but your negatives will still offset. I've found that negatives such as missed payments weigh much more heavily than positives. Outstanding debt makes up 30%, this will add a negative there. 15% is based on the length of time you've had credit, which this won't alter, 10% is based on new credit, which your car loan and proposed personal loan will affect negatively. The other 10% is based on types of loans you've had, which a car loan and personal loan will affect postively.

See more here

If you have a handle on your finances now and are keeping your balances low then in my experience the best way to improve your score is to wait for any negatives to age off and to reduce your existing balances on other loans and credit cards if you have any.
posted by IanMorr at 7:48 AM on June 1, 2009

You're putting yourself at risk anytime you take on debt. What happens if you loose your job or get sick? What if you have other, unexpected, expenses?

It sounds like you have $15,000 for a down payment. Why don't you talk to you bank and secure a loan for $15,000 borrowed against your savings? Then you can have the bank automatically draft $1,000 a month to pay down the loan. Your credit report will reflect timely payment, but you'll be covered in case of emergency.

$15,000 will buy a very nice two or three year old car.

$37,000 will also buy a very nice new car, with the exception that you're throwing about $5,000 dollar out the wind as you drive it off the lot.

Fixing your credit is about being smart. Going $17,000 into debt for a NEW car is not smart.
posted by wfrgms at 8:23 AM on June 1, 2009

Oh and if you really want the $37,000 car... do what most people do, and wait until your credit is better. 9.5% is silly for just about anything.
posted by wfrgms at 8:40 AM on June 1, 2009

I should've clarified earlier. Money is NOT of a concern to me right now. I can afford the $37,000 car and the monthly payment that go along with it. I just want to know what is the best way for me to improve my credit given what I plan on doing.
posted by willy_dilly at 8:58 AM on June 1, 2009

I did something similar, acutally. I was younger and didn't have any credit, but I had some cash. To estabilsh some credit, I got my dad to cosign my car loan and I put down a large down-payment. The good interest rate and low monthly payment ensured that I'd never be late or miss a payment. Three years later, my credit score, last time I checked, is over 775.
So, I don't think you're too crazy for doing this. But I'd apply this principle to a cheaper car. I got a car that was less than $20k new so I could be certain that I'd never owe more than it was worth, in the event that I needed to get out of it for any reason.

With a credit-building plan like this, it will work best if you're living well below your means. Remember, if you're going to establish good credit, you can't just afford the payment. You have to be able to afford it no matter what, otherwise you're taking a big risk going into debt. You could get a cheaper car, keep it nice for a couple years, and trade it in on your $37k baby once your credit has improved. Credit is a tool and you've gotta make it work for you.
posted by Jon-o at 9:49 AM on June 1, 2009

Credit scores (the more sophisticated ones that lenders see, not consumer reports) factor in total monthly income versus debt. If you want to increase your score you should ensure that any monthly debt you incur isn't too significant compared to your income. For the most part, you should see incremental improvement by simply paying on time. This is what gets reported, the "pays on time as agreed" aspect. Paying it off in advance probably won't net you any more increase in your aggregate score over paying it off over the course of the loan, provided you never are late.

But again, being subjectively able to "afford" the $550 car payment each month is not quite what credit bureaus will be using to score you. It will more be a question of that $550 versus your monthly income (as reported by you to future lenders who will probably seek verification) and any other payments you are making. At the end of the day, 660 isn't horrible and if you give yourself a few years of excellent credit behavior then it will probably peak past 700. If you had really nasty black marks on your record in the past then there's really not much hope of ever going to the stratosphere 800 levels no matter what you do.
posted by Burhanistan at 10:15 AM on June 1, 2009

Also, regarding your question of down payment amount, that is really hard to answer without knowing with lenders your car dealership uses. You'll have to hope for an honest finance officer (the guy after the salesperson) to tell you if it makes a difference in your rate going with $15k vs $10k. My guess is that since $10k is already over 25% of the total cost then it won't make any difference in the rate that you qualify nor have any impact whatsoever on your credit rating.
posted by Burhanistan at 10:18 AM on June 1, 2009

A 660 isn't a bad credit score (average), and unless you've had a bankruptcy or had a car repo'ed, then a 9.5% new car loan seems unwarranted. To answer your question, the size of the loan doesn't matter as much as you being timely with the payments, so save yourself some interest money and borrow the lesser amount.


Just to stop the never ending spread of misinformation regarding credit scores I'm going to chime in on a couple of Burhanistan's statements. Not trying to pick on you...

Credit scores (the more sophisticated ones that lenders see, not consumer reports) factor in total monthly income versus debt.

Credit reports, even the most sophisticated ones, don't take income into account at all. The IRS, government, employers, nor you report your income to the credit reporting agencies. They probably should take income into account, but they don't.


If you had really nasty black marks on your record in the past then there's really not much hope of ever going to the stratosphere 800 levels no matter what you do.

Time cures all. Most tradelines fall off after seven years. Public records after ten years. If you keep your nose squeaky clean long enough then your score can get up to the 800 range.
posted by curlyelk at 11:21 AM on June 1, 2009

Credit reports, even the most sophisticated ones, don't take income into account at all.

If you will note I mentioned that it would be in conjunction with taking out a loan in the future. Your income to debt is indeed a factor. This is why lenders ask to see paystubs and will call to verify employment.

Do you have a cite to backup your claim that anyone can attain an 800 credit score regardless of past excesses?
posted by Burhanistan at 11:28 AM on June 1, 2009

Nothing stays on your report forever, so with enough time and diligence anyone can reach an 800. A link to the FCRA. See page 22 for time limits.

I still think you are misunderstanding the role (or lack of) income has in regards to credit scoring. These two statements are wrong:

"Scores factor in total monthly income versus debt"

"If you want to increase your score you should ensure that any monthly debt you incur isn't too significant compared to your income"

You are correct that lenders consider credit scores and debt to income ratios when making decisions, but DTI is not reflected in scores or reports in any way. In other words, credit scores and DTI are two separate parts of a larger equation that lenders consider.
posted by curlyelk at 12:32 PM on June 1, 2009