Although you can’t change your credit history, there are ways to rebuild your credit score. Your score might be below average or low now, but a car finance can actually help fix that. A car loan is payable in monthly instalments over a set number of months, and that new payment history is how you can rebuild your credit.
Before we dive into the specifics of how getting a car loan can improve your credit score, it’s important to take note of two things:
What are credit bureaus?
Credit Bureaus are the collection agencies that gather your credit history. They’re private businesses that keep certain information about how your credit record is determined in its entirety. If you’re looking to learn more about what exactly is a credit score and how you can find out yours, read our previous blog post that explains the credit score ranges in Canada.
What makes up your credit score?
There are five components that make up your credit score:
- Payment history = 35%: The biggest factor that makes up your score is whether you paid your bills or instalments in full and on time.
- Credit utilization = 30%: Maxing out on your available credit can be detrimental to your credit rating. For example, if your credit card’s limit is $2,000 and you’re using $1,500 (or 75% of the available credit), your score will be lower than if you’re using a smaller percentage of your limit.
- Length of credit history = 15%: Your rating takes into consideration how long you’ve had credit or have been paying bills. If you’re new to Canada or just entering into adulthood, you might have little-to-no credit history.
- New loans or applications = 10%: If you’ve applied for numerous loans, your credit score will be negatively impacted, so only apply for what you truly need.
- Varied credit = 10%: How many different types of credit you have is the last piece of your credit rating. If you haven’t had more than one type of credit–student loan, credit card, etc… — your rating will be lower than if you’ve had a mix of different types.
Is getting a car loan good for your credit?
The fact of the matter is that you need credit to build your credit rating and a car loan can be a great way to do so. Car loans are not “revolving” credit like a Visa or MasterCard are, which means your instalments are set. Unlike credit cards, a car loan doesn’t give you the ability to access any extra credit. Since you can’t make any extra purchases, you won’t risk hurting your financial wellbeing.
Given that the largest portion — 35% — of your credit score is determined by your payment history, simply by making your car loan instalments, you can improve your rating. If you are late or miss payments, this information will be reported to the Credit Bureau. Consistency is key! Additionally, if you don’t currently have any instalment credit, a car loan is a way to diversify your credit mix, increasing your score.
In comparison to mortgages or other higher interest loans, car loans are a lower cost and instalments are over a shorter period of time. A car loan is a simpler and less stressful way to build your credit rating than some other types of loans.
How to build your credit with a car loan
Getting a car loan to improve your credit is the most effective if you take some (or all) of the following actions:
- Make a down payment. Putting down money can help your monthly payments be even more affordable.
- Be budget conscious. Choosing a car that’s well within your means will help ensure you can make monthly payments.
- Make payments on time. Ensuring you pay bills in full and on time accounts for 35% of your credit score, so add reminders on your calendar!
- Pay more than the minimum. If you’re able to, pay more than your set instalment, as this shows you’re responsible.
- Reach below the 30% mark as soon as possible. The faster you pay your loan off, the quicker your credit rating will improve.
- Avoid grace periods. If you have the option for extensions on payments, using them won’t help improve your credit score.
At Birchwood Credit Solutions we want Manitobans, regardless of their credit history, to be able to drive a Birchwood vehicle, while also improving their credit score. We’ll help you get into a reliable vehicle, with the option to refinance down the road if payments are made consistently. Auto financing is an effective way to rebuild or establish your credit score, impacting your life and future positively. When you’re shopping for your future car, Birchwood Credit is here to get you on the road to success.
Related blog posts:
- 5 Credit Misconceptions That Can Lead to Bad Credit
- How to Get Out of a Car Loan Explained
- 3 Questions to Ask When Buying a Used Car From a Dealer
- Car Finance for Students: 4 Steps to Getting Approved
- Buying a Car From a Dealer vs. a Private Seller
- What to Expect When Buying a Car with Bad Credit
- Car Loan Calculator
- Pre Approved Car Loan: How Does It Work?