Six Tips to Improving Your Credit Score with Your Car Loan



An auto loan is a stable form of debt that can build credit in steady manner. There are also several ways to leverage auto loans in your favor to raise the credit score as efficient as possible.

Leverage a low interest car loan

For those lucky borrower’s that have a prime rate car loan it might make more sense to start tackling other debts. A very low interest car loan may work to free up money for paying off credit card debt or other consumer debt. Paying off this other debt will free up the ratio of debts in a credit report to improve the overall score.

Refinance when necessary

It’s not necessary to keep the same car loan if a better interest rate can be in your favor. Sometimes that choice is limited when building new credit. However, 6-12 months should provide enough time for the installment car loan to lock into a lower rate. Consider contacting banks to do a pull on your credit report to lower payments.

Create flexible payments

Car loans can be flexible in terms of negotiating payment terms to avoid unnecessary blemishes to credit history. Replacing a 2-year note with a 4-year loan can temporarily reduce any credit risk and keep building good credit with positive payment history.

Mixing types of debt

When banks or employers check a credit report they are often looking for a healthy mix of credit management. A car loan is considered an installment loan. Most installment loans are based on a collateral. Adding a form of revolving credit such as a credit card in conjunction with a car loan is helpful to credit reporting.

Making additional payments

Making additional payments over a period of time on an auto loan can reduce debt and improve credit. Roughly 30% of the scoring model for the three major credit bureaus are based off of the percentage of amounts owed. Reducing debt in a timely manner will raise a credit score in a quicker time.

Documenting Payment History

Documenting timely payment can keep a record of communication between banks and the credit bureaus. In fact, it can work out as an alternative form of credit to show to landlords or lenders while credit is being built up.

An installment auto loan is one of the most effective ways to build a healthy credit mix. Building a long-term relationship with a bank with timely payments will quickly improve your credit score in no time.

Information credited to Honda Barn.

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