3 Ways A Car Loan Boosts Your Credit Score

If you have a low credit score (or no credit score at all), your chances of obtaining financing diminishes. Improving your credit score sounds complicated, but one way to get your credit record back on track is with a car loan.

1. You Need Both Revolving Debt and Installment Debt

Credit reports contain two basic types of financial accounts: revolving debt and installment debt. Revolving debt refers to credit cards, which make funds available over and over as previous balances are paid, while installment debts include most types of loans, from auto loans to home mortgages.

As of 2009, credit reporting agencies give weight to a consumer's ability to balance both revolving and installment debt. It shows the consumer can handle numerous financial obligations at the same time—as long as those accounts are satisfied with regular, on-time payments.

If you are trying to boost your credit score with credit cards alone, you might have an uphill battle. This is especially true if you only qualify for secured credit cards, which require an up-front deposit and work more like debit cards than extensions of credit.

To improve your credit score with installment debt:

  • Obtain a bad credit car loan if your score is insufficient to obtain a regular loan
  • Pay off the balance as quickly as possible—never miss a payment or send one late
  • Open a revolving account (such as a credit card) at the same time

2. You Need to Establish a Credit History

According to FICO, credit history makes up 15% of your credit score and payment history accounts for 35%. You cannot develop either aspect of your credit report without some type of loan or line of credit.

It might seem like a slow process, but you must start somewhere. Obtaining and paying off car loans will establish history with the credit bureaus and allow you to build your credit score over time.

Not only that, but one auto loan can lead to subsequent loans as long as you fulfill your end of the bargain. When you decide you need a new car, it becomes easier to gain approval for financing, which means fewer financial headaches.

To maintain a positive credit history:

  • Avoid closing accounts, such as credit cards
  • Only borrow what you can pay back based on the terms of the loan
  • Read more and review your credit report annually to evaluate your progress

3. Satisfied Loans Stay on Your Report for at Least Seven Years

If you are attempting to repair bad credit, you know that lingering delinquencies can hurt your ability to obtain financing. However, the opposite is also true: positive information remains on your credit report for a minimum of seven years—and sometimes forever.

Each check mark in the "plus" column on your credit report makes you a more attractive risk when lenders evaluate your applications for car loans, mortgages, and other accounts. Since positive information often remains on your report for longer periods, it is always a good thing.

To ensure a consistent climb from bad credit to good credit:

  • Ask the lender whether they will report your loan information to the credit bureaus
  • Keep records of all payments to ensure accuracy on your report
  • Avoid requesting new loans until the old ones are paid off

The best way to handle loans is to obtain them only when you need them. If you need a car for transportation to work or school, for example, it is not a frivolous use of credit. You are obtaining a necessary tool for your safety and well-being.

You aren't alone. In 2014, car sales have grown at exponential rates in Canada, with nearly 200,000 vehicles sold just in the month of May. Bad credit car loans allow you to obtain financing even if you have made mistakes in the past, and are trying to repair your credit score.