Getting a car loan to improve credit score
April 19, 2010 11:41 AM   Subscribe

Does it make sense to my (and his) credit score for me to be put on my fiancé's car loan?

My fiancé and I are in our mid 20s, and both with very good credit (a bit above 750, mine's about 10 points higher than his). For both of us, our only past sources of credit are credit cards that have all always been paid off each month -- my extra 10 points is probably due to a slightly longer credit history. Both of our credit reports say that among the factors "hurting" us is that we only have one type of credit. We know our credit is already quite good, but we're planning on buying a house in a few years (no real timeline here beyond "a few years"), and as such would like our credit scores to be as high as possible at that time. I've been reading past askmefi's on the issue of credit score, but I'm adding my own specific question to the mix:

He will probably be buying a new car this week. We have the savings to just buy it in cash, but his credit score would probably be helped by having a car loan, in order to diversify credit sources. Add to that excellent financing options from dealerships right now (Honda's offering 0.9% APR for 3 years, and we're assuming his credit is good enough to qualify), and he will probably put a big chunk down and get the financing, and make sure that anything leftover is paid in full at the end of the 3 year deal, and we probably won't end up losing very much money because we'll have the money earning interest at the same time.

My actual questions are:
a) does this actually make sense for him alone?
b) would it also help me and not hurt him (or help him less) to put me on this lease as well (i.e., apply for it jointly, so that both of our names are on it)

Supplemental questions include:
a) does it matter for the credit score how quickly we pay this off? It seems from past askmefi's that paying if off quickly is just as good as paying it off slowly, but what are the extremes to that?
b) I think outstanding debt plays into your credit score, so should we make sure it's paid off before we start attempting to get a mortgage?

Assume that we are unconcerned with having our finances entangled -- they already are to some degree, and we trust each other with money. And assume that we will always pay the lease on time -- I understand the possible risks of messing up the loan, it's the possible rewards of doing it right I'm confused about. We want to maximize both of our credit scores as much as possible over the next couple years, and we're hoping this is a good way to do it.
posted by brainmouse to Work & Money (11 answers total) 1 user marked this as a favorite
Just a couple of points:

1. Your credit score is just fine for buying a house.

2. Credit reports almost always list things that indicate what could make it better. We were just financed for a house, we were about as high as you can get in terms of credit score, and lenders still listed a bunch of stuff that we could have done better. I think that's typical, and I wouldn't stress about trying to work the system based on your credit score.
posted by SpacemanStix at 11:46 AM on April 19, 2010

I wouldn't worry about the potential positives this car loan could give your credit score, provided your score remains in the range you're talking about. I wouldn't put too much faith in bumping up a score with "diversity of credit."

When you go to get a mortgage, they'll look at three things -- your score, your income and your current debt load. A score of 750 is fine. Your income will get better with time (and so will your score). Your debt load ... well, if you have a car payment, your debt load is actually higher, so that's a (very small) negative.

Buy the car in cash if you can. Negotiate for a lower price like a crazed mad man -- after all, you're paying in cash, right there and then. The auto salesmen should be jumping out of their shoes to make you happy.
posted by Cool Papa Bell at 11:48 AM on April 19, 2010

To clarify just a bit, your credit score is just fine in terms of getting the best rate on your loan, as well. In terms of qualifying in general, they will look more broadly at issues like income and work history. But your credit score will in no way work against you, and will likely not improve your situation by having a higher score.
posted by SpacemanStix at 11:49 AM on April 19, 2010

Response by poster: I know my credit score is good, but I've been doing some reading, and 750 is not necessarily enough to guarantee the absolute best rates. See this article (which isn't loading, but is cached here). It might, but I'm not so interested in might.

I also understand that in the short term, having the debt will lower my score in, but assuming it's paid off before we go in for the mortgage, what effect will it have?
posted by brainmouse at 12:01 PM on April 19, 2010

Keep in mind that credit score reports *must* give some explanation as to what is "hurting" you - however, 750 is a very high score. Don't put too much stock in the "one type of credit" thing.
posted by restless_nomad at 12:01 PM on April 19, 2010

One more thing to think about. If you're on the loan, you would also want to be on the title. If you're on the title, you're now legally responsible for anything that happens with that car, including if he is in an accident. You, as owner, could be sued as well.

My wife and I are not on the title of each other's cars, we are not on the loans. If she takes that lead sled of a 1990 240 volvo wagon and drives it through the front of the grocery store, I'm not responsible (the volvo would win!).
posted by HuronBob at 12:05 PM on April 19, 2010

750 is an excellent rating, even though it is not the best possible. Given the potential issues that any loan arrangement -- or even, pessimistically, any relationship -- could hit, and you both having solid scores, I would recommend staying off the loan.
posted by davejay at 12:17 PM on April 19, 2010

I think outstanding debt plays into your credit score, so should we make sure it's paid off before we start attempting to get a mortgage?

I don't think it will have much impact on your credit score, but as others have said for a mortgage specifically your credit score is only one of several factors they look into. They will look at your debt versus your income and savings (something that's impossible to do with just a credit report), and in particular they will look at your monthly loan payments versus your monthly income. So getting rid of your debt before applying will almost certainly help, although the mortgage loan approval process is even less transparent than credit score calculations.

does it matter for the credit score how quickly we pay this off? It seems from past askmefi's that paying if off quickly is just as good as paying it off slowly, but what are the extremes to that?

If you are really just doing this to help your credit score, depending on how your loan works you might be able to just pay off 99% of the loan right away and leave a small balance for as long as you want. The way a lot of car loans are structured is that if you are ahead in your payments, your minimum monthly payment drops to zero dollars until you are no longer ahead of the repayment schedule. So you could just have a $50 balance sitting there for years and pay only a few dollars in interest, whereas on your credit report you would be shown as being current every month which will help build up your score.

Not all loans are setup that way, though, some have a fixed payment required no matter what. And some really bad ones will just hold your money and pay at the normal schedule if you send payments early, rather than applying them to the principal balance (you don't want that kind of loan in any case).
posted by burnmp3s at 12:25 PM on April 19, 2010

Don't go cosigning loans and stuff until you two are actually married. I feel like I've seen more than two questions on metafilter where this kind of stuff makes it difficult to disentangle when need be.
posted by anniecat at 12:28 PM on April 19, 2010

Your consumer credit score, which is the number you know, is not the same score that would be used by a mortgage lender. Fair Isaac offers a separate score model for mortgages that better reflects the risks of defaulting on a mortgage, rather than on a credit card. (There is also a separate score model for big-ticket secured installment loans like auto loans.) The various score models are naturally correlated -- someone who has a good credit history is probably going to have a good score regardless of how it is calculated -- but it is not unusual for your mortgage score to be higher or lower than your consumer credit score by 20 points or more.

Also, a mortgage lender is going to look more than just your score. They will scrutinize your entire credit report. For example, I recently applied for a mortgage and the lender wanted written explanations of credit inquiries that were not followed shortly by new accounts, as well as documentation of income and assets. In other words, having a poor score will knock you out, but having a good score is not enough on its own.

Basically, the only way to find out what interest rate you will get on a mortgage is to apply for one. And if you're going to do that, go ahead and do several, so long as you keep all inquiries within 30 days. However, if you have good credit, and a consumer credit score of over 700 is a good indicator that yours is excellent, and your credit report is free of dubiosity, you will likely get the best rates.

There is not much benefit to having both of you listed on the car loan. I can attest that having a car loan does not affect it much anyway.

Your strategy of taking the low-interest loan instead of paying cash seems sound to me. Don't fool yourself; you won't come out ahead by keeping the money in savings. You will make 1.5% APR at best, and lose a third of that to taxes, so you will break approximately even. Still, having the cash on hand for emergencies is reason enough to take this route.

Contrary to popular belief, paying in cash will not result in a better deal for you when buying a car. The dealer gets cash anyway; they don't care whether it's from a bank or from you. In fact, the dealer likely gets a commission for steering customers to a particular finance company, so they would probably rather have you finance it. Just negotiate the total price of the car without regard for monthly payment.
posted by kindall at 12:36 PM on April 19, 2010 [1 favorite]

I am a big fan of Dave Ramsey and he repeatedly says not to get into any financial entanglements with your SO until you are married. He also says to only buy cars with cash and never brand new cars until you have a net worth of a million dollars. BTW your credit scores look fine!
posted by MsKim at 3:15 PM on April 19, 2010

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