Did you know that you could improve your credit just by getting an auto loan, even if you’re starting with bad credit? It’s true! A car loan helps you add to a number of factors that make up your credit score, and we’ll show you how.
How an Auto Loan Helps Build Credit
Your credit score is made up of five factors which all carry a different weight. There are different things you can do to help improve these factors on an individual basis, but an auto loan can help because it satisfies several at once.
Most lenders use your FICO credit score when you apply a car loan, and the five factors that go into a FICO score are:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
When you’re struggling with poor credit, getting a bad credit auto loan helps you by adding to your new credit and your credit mix, while also giving you a chance to build a positive payment history. Let’s explore how this works.
A car loan adds a new line of credit to your portfolio, which accounts for 10% of your credit score. Lenders want to see that you’re applying for credit when you need it, and that you’re not constantly looking to get a loan or a credit card for anything and everything.
If you constantly apply for new lines of credit, it's often a red flag for lenders. When you’re not shopping for credit responsibly, it also lowers your credit score, which makes it more difficult to get approved for credit when you need it.
There are two types of credit: installment credit and revolving credit. It’s good to have both installment credit, like mortgages and auto loans, and revolving credit, such as credit cards and retail store accounts, because it gives lenders a complete picture of how responsible you are with both types.
A car loan is a good way to add installment credit to your portfolio, especially if it's primarily made up of revolving credit accounts.
Payment history is a big reason why auto loans can help improve your credit score. Because a car loan is something that lasts a number of years, it gives you plenty of time to build a positive payment history by making on-time payments.
Each timely payment adds to this history, and increases your score little by little over the entire term of your loan (assuming you’re keeping up with your other bills at the same time).
In fact, payment history makes up the largest portion of your credit score at 35%, so the more bills you pay on time each month, the quicker your credit score can improve.
Getting an Auto Loan for Credit Improvement
Now that you know you can use an auto loan to improve your credit, it’s important that you get the right car loan for your situation, especially if you’re starting out with bad credit.
A bad credit auto loan from a subprime lender can help, and these lenders know how difficult it is to get a loan when you’re struggling with your credit score. Subprime lenders use factors in addition to your credit score, such as income, employment, and residency, to help get you approved.
The tricky part is that not all dealerships work with subprime lenders, so it may not be as easy as just walking into one and being able to get a loan. Luckily, here at Drivers Lane, we work with an extensive network of special finance dealers that work with the lenders you need.
Getting the process of finding a local dealership is easy. Just fill out our simple, no-obligation car loan request form, and we’ll get to work matching you with a dealer in your area!