Pay off Auto Loan or Use to Raise Credit Score?

[planetm]

Hi there. I have a low credit score of 541 and have just taken out an auto loan for $4500 with 26.99% APR that is paid over 30 months. I will have enough money to pay the loan back in full in January 2012 but have been told to keep the loan for at least a year to raise my credit rating/score. Is this advisable and is all the interest I am going to pay in 12 months ($700+ I believe) worth it to raise my credit score? Will it even make much of a difference? I have one other loan which I owe $218 on and this will be paid off by beginning of next year. I also have several school loans for over $35,000 and many unpaid medical bills which are in default. I do not have credit cards or a lengthy credit history (only 4 years). What is best way for me to raise my credit score so I can hopefully one day buy a house?
Thanks so much for input!

[disneysteve]

Hi there. I have a low credit score of 541 and have just taken out an auto loan for $4500 with 26.99% APR that is paid over 30 months. I will have enough money to pay the loan back in full in January 2012 but have been told to keep the loan for at least a year to raise my credit rating/score.]

Whoever told you this is an idiot.

What is best way for me to raise my credit score so I can hopefully one day buy a house?

The best way to raise your score is to pay all of your bills on time and not over extend yourself with credit. Do that and time will help your score.

[cschin4]

My advice is to not spend one second of your life every worrying about credit scores. The ability to live within your means and pay your bills is the only score you need to settle on. I would spend my time paying off bills with exorbitant interest rates like 26.99% i would work 2 jobs to get that paid ASAP. Then, i would work to significantly pay down the other outstanding loans. ONLY THEN would i be shopping for a house. And, ONLY WHEN i had 20% saved in cash to put down. Otherwise, i would rent. If you live your life in that manner, credit scores don't mean much because you aren't trying to buy something that really is beyond your means.

[jpg7n16]

I will have enough money to pay the loan back in full in January 2012 but have been told to keep the loan for at least a year to raise my credit rating/score

Did this person happen to work for the car company and get paid to make sure you took out this ridiculous loan??

You already have SLs and will build a credit score by paying them over time. You didn't need the car loan to build credit.

I agree with DS, the person who told you this is an idiot. (financially speaking)

What is best way for me to raise my credit score so I can hopefully one day buy a house?

As pointed out above, if you're looking to succeed financially, this is actually the wrong question to ask. You should instead ask, "what is the best way for me to fix my finances so that I can buy a house one day?"

When looking at home ownership, sure they look at your credit score (the higher the better), but they also look at your financial position. Things like, how much debt is already outstanding? (the lower the better) what percentage of your income is going to required debt service payments? (the lower the better) and how much money do you have for a downpayment? (the higher the better)

From this it's clear that to be in the best position for buying a home, you need to take action to improve several areas of your finances, not just your score. If you follow these steps, you'll improve more than just your credit score:

1 - Get current on any debts you have (late fees can be more costly than high interest rates)
2 - Rank your debts from Highest interest rate to lowest interest rate
3 - Make min payments on everything and start attacking the highest rate loan with as much as you can spare (snowball payments)
4 - Continue that process until you have eliminated all debts
5 - Build up 3-6 mo emergency fund + 20% downpayment

Oh and take the company match at work. Contribute the max the company will match, no more no less. If you're not doing that already, you should be. It won't help you get a house, but it will help you get free money for your retirement.

[JoshuaHeckathorn]

Ugghhh...It pains me when I come across stories like this. Pay off the ridiculous auto loan as soon as you have the cash to do so. If you can do it before January, that's great.

Focus instead on paying your student loans on time and you'll continue to build your credit scores over time. In addition, you'll need to deal with your medical bills in default. I suggest pulling your free credit reports, taking a close looks at all your unpaid medical debts, and then devising a plan for getting them settled. Don't just ignore them in hopes they will go away at some point. They won't.

Once you've cleaned up your credit reports, then you can begin to think about building additional positive payment history on top of what you're building through the existing student loans. Secured credit cards can be a safe and effective way to do that until your credit scores move out of the "bad credit" range.

[Eric80]

your credit rating is important as this will affect whether in the future you will be entitled to get a loan however paying back your loan is also very important, so I think you need to assess the severity of the situation- whats more important for right now?

[BuckyBadger]

Um, whats the definition of usury, exactly? 'Cause 27% interest on a car loan seems like it to me.

Pay it off asap. Be good about the rest of your debt and the rest of your bills and your credit rating will climb all on its own.

[YLTL_Dan]

Um, whats the definition of usury, exactly? 'Cause 27% interest on a car loan seems like it to me.

I agree, that's disgusting!

According to the law of 72, if you had a 27% interest rate, your money would double in 2.66 years. These guys ripped you off and you need to get rid of that loan asap.

Pay your normal bills on time, and you'll slowly build your credit back up. Your primary focus needs to be on getting control of your money and not making bad decisions, then your credit score will come up.