Using a Car Loan to Establish Credit

**MonkeyMama** · 07-23-2010, 05:52 AM

Originally posted by Mark007 View Post

I'm trying to use a car loan along with a credit card to establish credit. I am capable of paying the car loan off in the very near future if I want to. It has a low rate because of a co-sign (5.9%), has about $6500 remaining, and I've had the loan since February.

I was wondering if anyone had any thoughts as to how long I should take to pay off the loan so that it factors in positively into my credit score. I was told by someone at the dealership that it doesn't affect your score positively if you pay it off any sooner than 1.5 years, simply because creditors might think there was an accident and insurance paid the remainder of the loan off.

Any thoughts you guys have would be appreciated.

Well, I personally would never borrow money just to improve my credit score.

But, I had to throw in that dealership comment is complete B.S. Never take credit/FICO advice from a salesman or a lender. They will tell you anything - I have heard it all.

I have only had one car loan, (I paid it off in a couple of weeks) and it did boost my credit score (From 800 to 830???). I had never had any loan outside a mortgage or paid off credit cards, before that.

You may wonder the reason I got a loan for a couple of weeks? The dealer gave me a bigger discount for a loan than paying cash. I read all the fine print, and agreed (most of 2000-2008 they earned more commission on credit sales). I then paid it off the first chance I could get. Anyway, I was surprised how much/fast it boosted my credit score. Since I had never had an auto loan, it helped my credit mix, and all, but clearly, in the grand scheme of things it doesn't make a darn difference to my credit ranking. Anything over 750-ish will be considered "perfect" by lenders.

**disneysteve** · 07-23-2010, 06:24 AM

Originally posted by MonkeyMama View Post

Well, I personally would never borrow money just to improve my credit score.

I agree 100%! Pay off the loan as soon as you possibly can. You should never go into debt just to raise your credit score.

Using a credit card for day to day purchases that you would make anyway and paying the bill in full and on time every month will benefit your FICO score just fine.

**Debt Vigilante** · 07-23-2010, 07:02 AM

Originally posted by disneysteve View Post

I agree 100%! Pay off the loan as soon as you possibly can. You should never go into debt just to raise your credit score.

Using a credit card for day to day purchases that you would make anyway and paying the bill in full and on time every month will benefit your FICO score just fine.

Agreed... pay that car off as soon as you can. There are plenty of other ways to build a credit score. To be honest with you, making car payments every month for a few years is not going to make your credit sky-rocket anyways.

**kork13** · 07-23-2010, 09:21 AM

Use credit to your advantage, not to the advantage of the lender. If you need a loan to get a good car for yourself, do it. If it takes you the full term to pay it off because money is tight, do it. But if you can afford to avoid both of those things, do it.

I bought my car with a loan even though I technically did have cash I could have paid with -- I was using the cash for savings, investments, etc., and at the time considered the liquidity more important than the interest I was paying. So for that reason, and also yes, to show some regular payment activity on my credit report, I was going to keep the loan for at least a year. I made payments a little more than double the stated loan payment, and ended up paying it off in ~20 months.

Just do what works for you. If you don't have an EF and want to preserve some liquidity, keep the loan for a little while longer as you build your EF. But when it suits you, whenever you feel comfortable with dropping the remaining few thousand dollars on it, go ahead and pay off the loan. You've got a few months of payment activity, so that will bolster your credit report. Don't worry so much about your credit at the expense of your wallet.

**TheStreetCeo** · 07-26-2010, 08:39 AM

I was a finance manager at a high end dealership for many years. With my priorities and beliefs on having bad debt in place it was a difficult job. I often had a hard time not telling people they were crazy for taking on that kind of debt and car payment, but I had to do my job and earn money for the family so I bit my tongue.
There was one time I gave a family my opinion on whether or not to take out a loan. They were purchasing a car for their son to use in college and wanted to establish some credit for him. I wasn't about to tell the CFO father who could probably purchase the dealership with his income no (he obviously had a great job and knew quite a bit about finance)so I recommended the 36 month zero interest loan that was available. He put his son on first and him second. I recommended they pay it off on month 13 which he did. One year of good car loan history is said to help with a mortgage later in life so i've heard.

**nmboone** · 07-29-2010, 10:09 PM

Originally posted by Mark007 View Post

I was told by someone at the dealership that it doesn't affect your score positively if you pay it off any sooner than 1.5 years, simply because creditors might think there was an accident and insurance paid the remainder of the loan off.

That's a new one, lol! Monkey Mama is so right on this. Makes me mad just thinking about them telling people crap like that. Doesn't even make sense!

**investingnoob** · 07-30-2010, 09:02 AM

I had no credit score, got my car loan that gave me a 770 credit score after 2 yrs.
But there is better way to raise it for sure...

**JoshuaHeckathorn** · 07-30-2010, 09:10 AM

What a load of crap that guy was feeding you! If you have the cash, pay it off.

Having a car loan will improve your credit mix a bit, which in turn will help improve your FICO scores, but it's certainly not worth paying 5.9% interest for the life of the loan. As Steve said, I would focus on using your credit card sparingly and paying it off every month in full.

Using a Car Loan to Establish Credit