How an Auto Loan Can Help Improve Your Credit
Five Elements That Sway Credit Scores
Not surprisingly, your credit score is not just a simple number that is pulled out of a hat. It is actually comprised of a complex set of data that can change frequently. This means that you could have a better credit score within just a few months -- as long as you follow some simple tips.
1. Types of Credit
The kind of credit you are holding can make a huge difference in your credit score. Ideally, you will have a mixture of different types of credit. Some examples might include a credit card, a home mortgage, a car loan, a personal loan and/or a store credit card.
Each of these different types of credit are weighted slightly differently -- depending on the credit reporting agency. Credit such as a car loan or home mortgage demonstrate to creditors that you have the ability to meet your financial obligations over the long term.
2. Utilization Ratio
The utilization ratio is the amount of credit you have compared to the amount you are currently utilizing. Put another way: the utilization ratio is a way to measure the outstanding balance you owe against your total available credit.
Aim to borrow no more than 20 percent of your total credit limit. Doing this can help boost your overall credit score since it comprises 30 percent of your credit score.
3. Payment History
This is the single most important factor that affects your overall credit score. Lenders look at your FICO score -- which is the number they use the most. Your FICO score is 35 percent of your payment history.
It is vital for you to make all your payments on time. Even if you have to pay only the minimum on your credit cards, be sure to always make them on time.
4. Credit Length
The longer you have a particular line of credit, the better is it for your credit score. In fact, 15 percent of your FICO score is attributed to the length of your credit history.
Even if you are no longer using a credit card, you should always keep it open. Not only will doing so help with your credit utilization, but it will also increase the length of your credit.
5. New Credit
It is inevitable: every time you apply for new credit, your score drops. In most cases, the reduction is only by a small amount. However, there is a caveat to that statement. If you apply for too many loans within a short amount of time, your credit score could really be dinged. The amount of new credit you have makes up about 10 percent of your FICO score. Once you start paying on the loans, your score should rise.
How An Auto Loan Boosts Your Credit Score
There are two types of credit: revolving and installment. Revolving credit constantly changes because it can have different payments and balances from month to month. A credit card is an example of revolving credit.
Installment credit involves having a regularly scheduled monthly payment that is the same amount. In addition to a car loan, student loans and mortgages are other types of installment credit.
Having an installment loan can help improve your credit. It can also make your credit utilization ratio more favorable. When you pay your car loan on time every month, your credit score can increase as well.
While your credit score might take a ding when you first get an auto loan, it is not likely to be much as long as you have not applied for other types of credit recently. In addition, the longer you have your car loan, the better it will be for your credit score.
If you have more questions about how a car loan will affect your credit score, make an appointment with the finance department at Sport Cadillac. Their experts can help you make the best financial choice while getting you into the perfect vehicle for your needs.
