The average Canadian now has $20,744 in debt. If you have less than perfect credit and too much debt, you’ve come to the right place. Knowing how to build credit starts with a car loan.
From your credit history to your credit mix, we’ve rounded up all the ways a car loan can help you raise your credit score. We’ll go over what goes into a credit score and how financing a car is one of the best ways to build your credit fast. Let’s see if a car loan is right for you.
Financing a Car Gives You a Solid Payment History
A big part of your credit score consists of your payment history. The more years showing a solid history of on-time payments, the better. This shows lenders you’re trustworthy with credit and helps to keep your score high.
When you’re making car payments, you’re showing lenders and other creditors that you’re reliable. Your car payment history will get recorded on your credit report. The more you show consistent payments on your car loan, the better.
Make sure you can comfortably afford your payments. When you get your loan, set your payments so that they are automatic. You can also set calendar notifications or alarms to remind yourself to make your payments on time each month.
You’ll Increase Your Credit Utilization Ratio
Your credit utilization ratio refers to the amount of credit you have in relation to your debt. This ratio plays a big role in calculating your credit score. The more credit you have that you aren’t using, the better your credit utilization ratio will be.
If you have credit cards, an auto loan, and a mortgage, for example, these are all considered debts. If you have a credit card balance of $500 and your credit card limit is $20,000, you have a low credit utilization ratio.
If you can keep your credit card balances low, your car loan will increase your credit utilization ratio. The lower this ratio stays, the more your credit score will rise. This is a huge factor in keeping your credit in good standing.
The Longer You Finance a Car, the Longer Your Credit History
The length of your credit history also plays a role in your credit score. If you’re younger with little credit history, lenders may be hesitant to loan you money. You don’t have a long enough history to show.
The good thing about credit history is that it doesn’t last forever. Your credit score may go up and down every year. When it comes to the length of your credit history, time is on your side.
If you’re new to credit, a car is a great first step to help you build a credit history and keep your score up. Unlike a mortgage or other forms of credit, your age won’t affect your ability to qualify for a car loan.
You’re Boosting Your Credit Mix
The more different types of credit you have, the better it is for your score. The different types of credit are known as your credit mix. A healthy credit mix features several different forms of credit and debt.
Let’s say you have two credit cards. If these are your only forms of debt, you don’t have a great credit mix. Having a car loan will diversify your debt. It will also show you’re capable of managing different debts with different payments.
To help boost your score and your credit mix, add a car loan to your portfolio. You’ll show lenders you’re responsible enough to pay credit cards, car loans, and more. This will help boost your score and increase your chances of getting more credit in the future.
Always Make Your Payments on Time
One of the best things you can do for your credit is to pay your bills on time. Late or missed payments will ding your score. The more you have, the worse your score becomes.
To help keep your score up, pay your credit cards, bills, and car payments on time. Having a car payment will give you a bill you can use to increase your credit score. Make on-time payments a priority.
Missed payments also come with more serious repercussions. Not only will you lower your credit score but you could also find yourself speaking with a debt collector or collections agency. If you have unsecured debt such as a credit card or medical bill, the creditor will try and recoup their money using one of these agencies.
On a car loan, the car is used as collateral. This means car loans are secured debt. If you miss payments or fail to pay, your car can be repossessed.
You likely depend on your car for everything from getting to work to getting groceries. Make sure to keep your car loan in good standing so that you don’t risk getting your car taken back. This is an inconvenience that will have a ripple effect on many aspects of life.
Manage Your Spending
To help boost your credit score, one of the best things you can do is to manage your spending. Overspending will cause you to turn to credit cards. This leads to more debt, higher interest rates, and a lower credit score.
To keep your score in check, you have to keep an eye on your spending. Another repercussion of overspending is that you won’t be able to pay your bills on time. You may spend more than you should and miss a car payment.
Getting a car that’s out of your budget will also cause problems. It means you’re spending too much on your car and you aren’t able to pay for other expenses.
Missing a car payment will ding your credit and lead to late fees and higher balances. It’s difficult to break the cycle of overspending and getting in over your head. Keep your spending down, make making your payments a priority, and your score will stay where it should.
Create a Budget Before Financing a Car
To help you keep your spending under control, you’ll want to create a budget before buying a car. Start with the income you have coming in. Next, write out all your bills and expenses.
When you see what you have left, you can plan a car payment that fits within this budget. The less you spend, the more wiggle room you’ll have. To make sure your budget is accurate, take your time writing out everything you pay for.
The more detailed you are, the more accurate your budget will be. It’s almost impossible to know what you spend each month without going through your bank accounts and credit card statements line by line. Overestimate what you spend on eating out, entertainment, and other luxuries to give yourself a buffer.
If you see any expenses you’re not using any longer, cut them out or cancel them. This could be gym memberships you don’t use anymore or music subscriptions you didn’t know you had. The more you can trim, the more comfortable you’ll be keeping up with your payments.
Check Your Credit Score Regularly
Another way to stay on top of your credit is by checking your score yourself before you purchase a car. Your lender will check your score and review your credit history, but it’s always a good idea to take a look for yourself as well.
Before you buy a car, it’s helpful to know if your credit is in good standing. You can check your score and your payment history, as well as the different types of debt you have. This is also a good time to dispute anything you think is reported incorrectly on your score.
Finding a Car That Fits Comfortably in Your Budget
To help keep your car payments and your score in check, it’s always best to stick within your budget. To help make sure your car payment stays within your means, speak with your dealer or your lender about your budget.
Take a look at your budget and see what you’re comfortable paying each month. Sticking with a lower payment will help make sure you can pay all your bills on time and that you won’t miss your payments.
How to Build Credit Fast with a New Car
If you’re looking for how to build credit fast with a new car, you’ve come to the right place. We can help show you which car payment will fit within your budget. We work with hundreds of car dealers to make sure you have plenty of options available to you.
If you’re ready to find your new car, fill out the application here. We’ll help you finance a car, even with less-than-perfect credit.