Building a good credit score is important when applying for certain loan products. It determines the credit risk of lenders in loaning you money. The lower your credit score, the lesser the chances of a loan approval. If you have a poor credit score, you might be looking for different ways to boost it and one thing you might be looking at is getting a car loan. But do car loans really help improve your credit score?

Factors that Determine Credit Scores

There are different factors that affect a person’s credit score.

  • The first one is the payment history. This factor greatly influences credit scores. Making on-time payments to lenders show that you are a responsible borrower. Consistently avoiding late payments and loan delinquency will increase your credit score.
  • The second factor is credit utilisation, which is also highly influential in determining a credit score. It is the ratio between the amount that you owe on your credit and your total credit limit. The lower your credit utilisation is, the higher your credit score will be.
  • The third is the age of credit history. Not only do creditors want you to make consistent on-time payments on your debt, they also want to make sure that you have been doing it for a long time. Your age of credit history is determined by the average age of your lines of credit. Longer credit history will lead to a better credit score.
  • Lastly, having different types of credit or credit mix will also help your credit score, though not as much as payment history and age of credit history. If you have credit cards, instalment plans, personal loans and a home loan, it will strengthen your credibility as a borrower for making different lenders trust your credit capabilities.

Getting a Car Loan Helps your Credit Score

Getting a car loan means opening a new line of credit. If you already have existing credit cards or mortgage loan, a car loan will contribute to your credit mix. This alone can somewhat help your credit score. But the thing that can significantly boost your credit score is paying the car loan consistently on-time for its entire term.

It will give you a good payment history on your credit report, plus a long credit history if you don’t default on the loan for three or five years. Making timely car loan repayments also lowers your credit utilisation, which will help increase your credit score considerably.

More information:

What credit score is required for a car loan?