Will A Car Loan Lower My Credit Score?

Building healthy credit can be extremely beneficial for borrowing loans, receiving credit card approvals, acquiring assets, and more.

Although credit scores in the “excellent” range are ideal, it can be difficult to achieve or maintain. Good credit scores are contingent on regular payments, zero or limited debts and many other variables.

In short, the answer to “will a car loan lower my credit score?” is yes and no. Using a car loan to build credit has proven to be advantageous for many, but it is entirely dependent on an individual’s approach to credit and their car loan term. Car loans can be used to lower credit scores as diversify credit mixes, and credit providers like to see that a borrower is reliable across various forms of credit.

We’ve developed eight tips to increase credit scores–including getting a car loan in Toronto! If you follow these tips, you’ll be well on your way to an “excellent”, or low-stress credit range.

8 Ways to Increase Your Credit Score

1. Make Regular Payments

We understand that the concept of paying bills on time is straightforward, but making payments can get difficult when there’s a lot going on.

To avoid late payments or simply forgetting to make a payment, we recommend following a regular payment calendar. After making consistent payments, lenders will be happy and you’ll have less stress from not having to worry about whether or not you’ve paid your bills. Regulated payments will read as you being trustworthy, and that’s beneficial to all parties involved!

Keep in mind that this rule doesn’t just apply to paying your credit card on time, it involves all forms of credit: utilities, cell phone, rent/mortgage, cable and more!

Ultimately, if it is a bill, pay it on time. Late or missed payments can significantly harm credit scores, so it’s better to avoid it!

2. Establish a healthy credit mix

A “healthy credit mix” is similar to walking into a restaurant and seeing a buffet with several different options. Big families often go to buffets so everyone can find something suited to their dietary needs and preferences, and ultimately everyone will be happy. Similarly, having a myriad of options through different sources of credit can prove to credit providers that you are responsible across all your borrowing methods.

Before finalizing credit loan applications, many lenders actually prefer to see a borrowing set, including different mixes of credit like a car loan in Toronto, home loans, student loans, credit cards, and credit accounts (that are paid on-time, of course!). With a good mix of credit, lenders will be more likely to approve your requests as they will see you fit to manage finances responsibly.

3. Setup automatic bill payments

After emphasizing the importance of paying bills regularly and on time, we highly recommend arranging for automatic bill payments–it’s an easy fix!

There are so many useful tools in the online world that can aid you in improving your financial management. The days of physically entering a bank branch to pay off debts are long gone. Now, almost every major bank offers online banking through their apps widgets, and websites. They have made banking easy and accessible across all mobile devices so that you don’t have an excuse to miss payments. By setting up automatic payments, funds will automatically be deducted from your account and paid towards your credit bills without requiring you to do so manually.

Why not use these free, easy resources to your advantage? Setting up online banking and automatic bill payments can contribute to building credit quickly and save headaches in the future.

4. Use your available credit more

In 2019, paying with cash (at places other than cash-only businesses) are a rare occurrence, and that’s for good reason!

Using your credit cards as your primary method of payment (and paying it off regularly ) shows credit lenders that you are able to utilize credit responsibly. This is an effective and easy-to-practice method in building your credit up. Lenders love to see healthy credit use and more importantly, responsible spending.

Although we do recommend this process to increase your credit score, we also want to not to overspend beyond your means. It’s important to keep in mind of what you can afford so that you will be able to pay it off in full! For example, rather than spending the toonie you were going to use for your morning cup of coffee, use your credit card instead!

In addition to increasing your credit score and getting in the good books of creditors, increasing credit card frequency usually results in higher rewards through your credit card company!

Rewards programs can be a huge plus, but be weary–credit card companies only offer incentives to rack up, and make a profit off of interest rates. On the bright side, if you play it smart and only use your card for necessary purchases, you can definitely benefit from it! Some credit card companies offer rewards based on a points system while others have cash back rewards of up to 2%. You could even earn free flights just by using your credit card regularly.

5. Negotiate with your Credit Lenders

We’re sure you’ve heard the classic phrase, “If you never try, you’ll never know”. It’s hard to argue that you missed a payment when it is tracked by creditors–but you can try to reach a mutual agreement or negotiate to erase any accounts or debts that were collected. If you contact your creditors and offer to pay your balance, and if they agree (get the agreement in writing!), you can potentially have it re-reported as “paid as agreed” or even removed from your account.

If there’s one overarching lesson to takeaway from all of our tips, it’s that credit functions as a very important part of modern society. Why not give credit to credit? Aiming to keep credit health at good levels not only opens doors to better financial opportunities, but it can actually save money long-term through avoiding high interest rates.

6. Maintain Old Debts

As soon as teenagers turn 18, they often begin the process of building credit through their first credit card. They can also start building credit as an authorized user on someone else’s credit account (for example, a parent).

Unless you have good reason to close an old account, try to leave it open! Keeping old records and accounts on your credit report has historically been an effective and easy way to retain credit scores. When it comes to the credit world, credit providers appreciate longevity and consistency– the longer the history of using a credit card responsibly, the better. If someone regularly paid off their credit card bills for 5 years straight, their credit card score would reflect that and likely rank in the “excellent” range.

7. Maintain Low Credit Card Balances

When it comes to credit health, a general rule of thumb to follow is keeping low credit card balances. Try to keep your credit balance to 25% of your limit if you can, and having a 10% monthly spend of your limit is the best way to maximize your credit health. If you have a $5000 limit, it’s best to keep your balance at around the $500 mark.

The reason why it’s ideal to keep a low credit balance is that balance amounts are perceived poorly by lenders. For example, if you have a $2000 credit limit and are spending $1999 monthly, it doesn’t reflect a good credit available to credit spent ratio–and that’s what credit bureaus use to determine your score! This can make a huge impact on your credit level as your used credit vs. available credit ratio accounts for 30% of your credit score (on average)!

8. Make Your Credit Limit Higher

Similar to the concept behind increasing your credit card frequency, we recommend submitting a request for your credit institution to increase your available credit limit. Keep in mind, this is not to encourage you to spend more or outside of your budget, but more so to demonstrate that you’re capable of spending responsibly. If you utilize your credit well and without overspending or having high balances) , it could definitely move you from the red and into the green.

Once you receive a better credit score, you’ll have increased expendable funds due to the savings you’ll have from avoiding high interest ratings!

Prioritizing Credit Repair Methods

To build your credit efficiently, we suggest reviewing your credit reports and spending habits. Once you have a general sense of where you spend the most, you can actually use it to your advantage.

The average credit score breakdown is as follows:

1. Payment History (35%)
2. Amount owed (30%)
3. Length of History (15%)
4. New Credit (10%)
5. Types of Credit Used (10%)

Payment history and amount owed account for over 60% of your credit score, so if you can focus on those areas first, then you can get to a high score a little bit quicker. Follow our tips to ensure you make regulated payments and work to reduce your “amount owed” by paying off car loans or other debts.

After that, we recommend strategically following our tips to incorporate new forms and types of credit into your credit mix, as well as retain your length of credit history!

Improving credit scores can take 30-60 days to see initial changes, but if you stay firm on a strong approach to your credit, you’ll definitely be able to see your credit score steadily increase!

Here at Autoloans.ca, we offer full-service experiences for anyone looking to get into the car of their dreams. Whether you have good, bad or unestablished credit, we’ll work to find you a car that fits your lifestyle, budget and overall expectations.

If you want to build credit through a car loan in Toronto, contact Auto Loans Canada and we’ll help you get started.