How can you Improve your Score?
Your credit score is an indication of how well you manage your existing debt, and a lender may make its decision to approve a loan application based on that number. Let’s take a closer look at the various ways that a car loan could have an impact on your credit.
Increase Your Score by Making Timely Payments
Your credit score is based on a number of factors such as your ability to pay your debts in a timely manner. If you have a poor credit score or a thin credit history, making a car payment on time each month can help to improve your ability to get additional credit in the future. If you currently have good credit, making your payments on time can keep you in good standing with your lender. Your payment history accounts for 35% of your FICO credit score.
Reduce Your Cumulative Debt Balance
Each time that you make a car payment, you reduce the amount of money that you owe to your lender. This is important because the amount of debt that you currently have accounts for 30% of your overall credit score. If you want to improve your credit score faster, it may be a good idea to consider making more than the minimum payment each month. Most auto lenders will allow you to pay off your balance ahead of schedule without charging you any fees or penalties.
Improve Your Credit Mix
Lenders like to see that you have experience with both secured and unsecured lines of credit. Student loans and credit cards are examples of unsecured debts while homes and car loans are considered to be secured debts. Your credit mix accounts for 10% of your overall credit score. Therefore, you should only take out a car loan if you legitimately need help financing your next car purchase. Furthermore, you should never borrow more than you can afford to repay as doing so can make it harder to stay current on your account.
Having good credit can make it easier to get favorable terms on an auto loan, and one of the easiest ways to get good credit is to make your car payments on time every month. Ideally, you will check your credit report prior to applying for a loan to ensure that the information that lenders use to evaluate your application is 100% accurate.