Oftentimes when people set out to purchase a new vehicle, they either don’t know about or haven’t considered a trade-in. If your credit isn’t where you want it to be but you’re in the market for a new vehicle, you can actually rebuild your credit score by trading in your current vehicle. In simplest terms, when you trade-in your vehicle, the dealership determines its value and offers you a sum of money which you can put towards your next vehicle. If your car is already paid off it’s even better, but you can still trade in a financed vehicle. A trade-in is a great way to build up your credit score because you can make consistent payments, proving your reliability as a lender.
Read on to learn about the optimal credit situation for car buying, how to rebuild your credit score with a car loan and tips for building your credit and stabilizing your finances.
What is a good credit score to buy a car in Canada?
While there isn’t a golden rule for the best credit score you need to buy a car, it’s good to know how your credit will affect your car loan.
Generally speaking, the higher your credit score, the lower (better) your interest rate. Conversely, the lower your credit score, the higher (less optimal) your interest rate. Interest is the fee you pay for taking on a car loan so ideally the less you need to pay, the better. That being said, it’s not impossible to get a car loan, even if you have less than perfect credit (under ~660). At Birchwood Credit, we’ll help you find an affordable vehicle that fits your budget and needs so you can continue making consistent payments, in turn rebuilding your credit as you pay off your loan.
If you’re planning on trading in your current vehicle, you can also read our tips on how to maximize your trade-in!
Rebuilding a credit score with a car loan: does financing a car build credit?
In short, YES – you can rebuild your credit score with a car loan (and even by trading in your current vehicle).
If your credit isn’t where you want it to be, it’s possible to slowly improve your credit with a loan. But how? You have to use credit to build credit, so even if your score is low, you’ll need to be using credit actively in order to bump that score up. 30 per cent of your credit score is based on how much credit you’re using and a car loan is a great way to take on this challenge.
While an auto loan may seem like a lot up front, places like Birchwood Credit can work out a payment plan that actually fits your budget so you can make consistent, smaller payments to pay down your debt. This will help your credit score rebound much faster than other loan types. 35 per cent of your credit score is based off of your payment history so it definitely matters. Making consistent payments shows lenders you’re a trustworthy borrower and in turn, increases your credit score.
If you have a vehicle to trade in, the value of that vehicle will be put towards your new vehicle loan and could save you some money in the long run. This would help you pay off your loan and ideally increase your credit faster.
Tips for rebuilding your credit score
Wanting to improve your credit score? Trading in your vehicle is just one option. Here are some other ways you can rebuild your credit and gain financial freedom.
- Save up for a down payment. The more money you can pay up front, the less payments you’ll have to make later. Plus the smaller the loan a lender has to give, the less risk they take on (and the better they feel).
- Make payments on time, every time. Consistency is key when it comes to credit. Lenders want to see you are responsible and making payments on time, every time. This will increase your credit score faster and help you develop a good habit you can apply to other loans.
- Keep your credit card balance well below the limit. If you can keep your balance below the halfway point, the faster you can rebuild your credit. This shows the lender that you’re not maxing out your card every month, building their trust by showing you aren’t a risky borrower.
- Don’t spend beyond your means. Like we said above, you have to use credit to build credit – but use your discretion. It’s better to have a few active loans that you can realistically manage than to have a bunch you cannot.
- Limit your number of credit checks. Everyone applies for credit now and again and when they do, the lender will get their report from a credit bureau. Too many credit checks can actually lower your credit so in keeping with the tip above, try to be choosy about the credit you take on.
- Check your credit report and know your credit score. The first step to financial independence is knowing where your credit stands, so checking your credit report regularly is essential if you’re concerned about your credit. You can check your credit securely and for free with our Secure Credit Check or with a third-party app like Credit Karma.
Let’s start rebuilding!
Your credit score doesn’t have to prevent you from buying a car. Fill out our Car Loan Application to get the approval process started, whether you’re looking to buy outright or trade in your current vehicle. If you trade in before September 30, you’ll get a minimum $1500 guaranteed towards your upgraded ride! All vehicle makes, models and years are eligible. Now is the perfect time to start rebuilding your credit with an auto loan.
Check out these other resources on rebuilding your credit score: