How to Build Credit with a Car Loan

When it comes to improving your credit score, taking out a car loan is one of the most effective strategies. By making timely payments on your loan, you can increase your credit score in key milestones such as six months, one year, and eighteen months. However, if you want to maximize the impact of your car loan on your credit score, it's best to keep making monthly payments. Before you go to the dealership to drive your new car, make sure you take appropriate steps to improve your credit and reduce your debt obligations.

If you need a little extra help building credit, consider tools like Self or other credit-building tools to help you build your credit and increase your savings. Paying off your car loan early by making additional payments or making larger payments each month can further help your credit score while saving you money on interest. If you originally got your car loan at a higher interest rate because of low credit, you could refinance your car loan to lower your monthly payments once your credit score has improved. When it comes to the length of credit history, older is better.

This is why you should always keep credit cards open, whether you're using them or not. When you open a new credit account, such as a car loan, you may lower your score because it decreases the average length of your history. The length of your credit history constitutes up to 15% of your rating. Making the minimum monthly car payments on time will improve the payment history factor in the FICO rating model.Remember, if you're late on your monthly payment or don't repay the car loan, the co-signer will likely receive the same negative payment history mark on their credit history.

If you don't repay the loan, you'll likely end up with the loan in receivables and a recovery on your credit report, which can result in a decrease in your FICO score.Now that you know that financing a car can generate credit, let's discuss whether car financing is a smart option for generating credit. If you want to increase your credit score by 100 points in 30 days, you shouldn't rush to buy a car with a loan.