How effective is a quickly-repaid car loan at fixing bad credit?
December 26, 2017 10:01 PM   Subscribe

We're about to buy a new car, and are considering getting an auto loan purely for the purposes of boosting my wife's credit (which is currently around 670).

The idea is she'd get an auto loan for about $10K, make monthly payments for about a year, and then just early-pay the remaining balance (instead of continuing to make payments for another three years), so we don't actually have to pay a lot of interest.

Would this be effective at boosting her credit score?

To be clear, there's no other reason for us to get a loan (instead of paying in full) since the interest rate she gets is rather bad, and we can afford to pay in full.
posted by splitpeasoup to Work & Money (7 answers total)
670 is considered a good score, so it really depends why it is where it's at. Is it your debt to credit ratio? Is it your lack of history? Is it a history of late payments? Average age of accounts?

Looking at your credit score will tell you a little, but your credit reports will tell you a bit more. There are great resources out there to help you with your credit rating, but it's hard to tell if this loan with hurt or help you in the long run without knowing why your credit is where it is.
posted by AlexiaSky at 10:11 PM on December 26, 2017 [5 favorites]

Anecdata: A few years ago when interest rates were lower, I paid in full for a new car. My reasoning was miserly for both dollars and minutes. In the subsequent year my credit score went up over 80 points. Coincidence or cause? I also was keeping my bank-issued card balance low by paying off card expenditures via handy online banking transfer, so I had flow but rarely had a balance due. That may have had bigger effect. Or perhaps the calculation formula changed.
posted by gregoreo at 11:09 PM on December 26, 2017

You should be able to get a 1 year loan. Get it from your bank or credit union for the lowest rate and fees. If the dealer has a 0% interest promo, look for other expenses in the loan, and don't be trusting.
posted by theora55 at 5:57 AM on December 27, 2017 [1 favorite]

Agreeing with AlexiaSky - having an auto loan can be "good" because it's another type of loan (if your wife currently only has credit cards on her report, for example), and it will give her a year of on-time payments. But it won't make her credit history longer, and it won't do much to make up for late payments or prior delinquencies, and it will make her debt-to-credit ratio worse, and applying for the loan will ding her score a bit (only a little, and not for long, but still).
posted by mskyle at 6:25 AM on December 27, 2017

If you already have a mortgage or student loan, then adding another "installment loan" will not help in itself. (The one "ding" on my credit report is the absence of an installment loan, which...eff that, really.)
posted by praemunire at 8:43 AM on December 27, 2017

My intuition says this probably won't significantly affect her credit score, but the actual impact depends a lot on all the other factors on her credit report. I'd suggest getting at account at Credit Karma, which is a free service and a good idea in general for credit score/identity theft monitoring. One of their offerings is a Credit Score Simulator that is designed to give pretty good estimates of how various changes, including taking out new and different types of lines of credit, will change your score.
posted by exutima at 11:46 AM on December 27, 2017

You may want to browse Reddit's personal finance wiki. Under the "Common Credit Myths and Misconceptions" section, there is one called "I should take out an installment loan for no reason other than to pay it back and boost my score":

"You really shouldn't. While you will, over time, gradually build a payment history, keep in mind that account mix is only a small fraction of your score. It's not worth paying hundreds in interest to see what is often a five point increase in your score for this category. Not to mention, your amounts owed category (which is 30% of your score) will be damaged for the time you are paying it off. Instead, consider getting a credit card (or secured card, if you have little or bad credit history) and paying the statement balance in full each month. That will build a strong enough payment history without having to pay interest."
posted by scottatdrake at 11:47 AM on December 27, 2017 [3 favorites]

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