You’ve finally made a choice to purchase a new car, congratulations. Chances are you have a few questions on your mind, like whether you should get a brand-new car or a used car, whether to get a car loan and if/how it will affect your credit score.
In this article, we answer the following questions
· Does financing a car help build your credit score?
· Is buying a car the best way to get a good credit score?
· What are tips for financing a car?
Does Financing A Car Help You Build A Good Credit Score?
When managed responsibly, an auto loan could help you build a good credit history, assuming the length of credit history was not substantial. Lenders will be interested in seeing a good credit to give you a credit car loan.
In addition, an auto loan can help strike a balance on your credit mix. A credit mix is a ratio between your instalment loans and revolving credit. Instalment loans include car loans, home loans and personal loans etc. while revolving credit refers to credit cards, lines of credit etc. If you have only revolving credit, adding an auto loan will add diversity to your credit report.
How Auto Financing Can Ruin Your Credit Score
Missed or late loan payments can harm your credit score. If you default on your auto loan, you will end up in collections, and repossession will get promptly added to your credit report causing your score to drop.
In addition, when you apply for a car loan through a dealership or a third-party lender (banks or credit unions), they will do a hard inquiry on your credit profile. This process is done to determine your creditworthiness. The only downside is hard credit inquiries may result in a low credit score.
Other Ways To Improve Your Credit Score
A good credit score increases your eligibility for numerous opportunities, including acquiring loans at low-interest rates. So it is best to work on improving your credit score. The first step towards a good credit score is making on-time payments. If your auto loan has a high-interest rate paying it off faster will save you money and improve your credit score.
Tips For Financing A Car
When it comes to repayment, most people opt for monthly payments, which is a good plan to keep up with payments. Borrowers should start making a financing plan before visiting the dealership. It is also important to know how much of a down payment you can afford.
It may also help to go through your payment history if you have one before getting new credit. This way, you have a clear picture of your credit rating before financing a new vehicle. If you are keen on getting lower interest rates, experts advise working on bad credit before purchasing a vehicle.
For reference, Equifax credit scores range from 280 to 850, while TransUnion scores range from 300 to 850. To get a good score with TransUnion, you need a minimum credit score of 650 in Canada.
Final Thoughts
In a nutshell, financing a car is a great way to improve your credit score and avoid the higher interest rates on future loans. However, there is a distinct possibility that a car loan can harm your credit score if poorly managed. Whether you are looking for a new car or a used car in Canada, the team at DriveNation is poised to help you make this major step by helping you find the best auto financing suitable for any vehicle model. Contact us today for more information on Canadian auto loans.
