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Need to Establish Credit? Buy a New Car!

By Posted on 3 m read 223 views

If you’re a young adult starting out on your own, you no doubt want to establish good credit as quickly as you possibly can. If you’re someone who has gone through a bankruptcy, you definitely want to reestablish your good credit as quickly as you possibly can. Surprisingly enough, buying a new car can help you in both situations.

Getting a new car loan benefits you in the following four ways:

  1. You get to drive a new car.
  2. Your car loan represents new credit.
  3. Your car loan also adds to your credit mix since it’s an installment loan.
  4. Your monthly payments, made on or before their respective due dates, establish you as a good credit risk.

Initial Credit Report Effect

When you buy a new car, generally the dealer sends your car loan application to more than one potential lender. Under normal circumstances, your credit score drops a few points every time a potential lender looks at your credit report. However, multiple looks for the same car loan count as only one look. Consequently, your credit score takes only one minor hit as opposed to numerous ones.

Long-term Credit Report Effect

It goes without saying that making all of your car payments on time becomes especially crucial. Given that most car loans last for at least five years (60 months), your excellent payment history will have a great positive impact on your credit score, moving it dramatically upward in as few as six months.

In all likelihood, your new car loan will carry a high-interest rate if it’s the first loan you get when starting out or after going through a bankruptcy. But due to your now good credit score and report, other lenders probably will be glad, after a few months, to let you refinance your loan with them at a lower interest rate. This could substantially reduce the amount of your monthly payments.

Mortgage Considerations

If buying your dream home is high on your wish list, this is another way in which establishing credit with a car helps you. Since buying a home may well represent the biggest purchase you make in your lifetime, getting an advantageous mortgage is something that will benefit you for years to come.

Thanks to the good credit score you achieved by means of your new car loan, and the excellent credit report you achieved by making all your payments on time, any potential mortgage lender who looks at your credit report will see that you are someone who handles money responsibly and therefore are a good credit risk.

Credit Card Considerations

Bottom line, if you need and want to establish credit as quickly as possible, getting a new car loan and paying it off on time is definitely a good way to do it. Whether you’re a millennial just starting out or a mature person in need of reestablishing your credit, you know that it’s difficult, at best, to live on a cash-only basis. For some things, like online purchases, airline tickets, car rentals, hotel and motel reservations, etc. etc. etc., it’s well nigh impossible.

The good credit score and report you achieve by means of your new car loan will make it easier for you to get a good credit card. Otherwise, you’re likely facing having to get a prepaid card or one with an exceptionally high-interest rate. You’ll find neither of those options particularly exciting, nor will you enjoy using any such credit card you get, knowing what you’re paying for it, one way or the other.

And never forget the greatest personal benefit you get from establishing your credit with a car loan. The car itself!