Having a good credit score is very important as it helps you to qualify for low-interest rates on a wide variety of debt products, including auto loans. If you are looking to buy a car but have a low credit score, it is still possible to buy a car with little credit if you are willing to accept a higher interest rate or put more money down. Furthermore, buying a car could improve your credit over time.
Adds Good Debt
One way that buying a car can improve your credit is by adding good debt to your credit report. Part of the credit score calculation is based on whether you have good or bad debt on your credit report. Good debt includes mortgages, student loans, and auto loans while bad debt includes credit cards. By adding an auto loan, the percentage of good debt will increase and so will your score.
Gives Opportunity to Improve Payment History
The most significant factor that goes into your overall credit score is your history of making debt payments on time and as agreed. When you take out a car loan, you will have the opportunity to make all of these car payments on time. When you do this successfully, you will see an increase in your credit score over time.
Shows Credit Worthiness
Merely being approved for an auto loan will also improve your credit score. Part of the credit score calculation factors in whether or not other creditors are willing to extend your loans. When you have evidence that you’re approved for an auto loan, it will make you look better and will improve your credit score slightly.
If you have a relatively small credit history, adding even one more account to your credit report will be very beneficial. One of the parts of your overall credit score includes your history of making payments historically on time. If you do not have any accounts in your name, it will hurt your score. Adding a car loan to your report will add another account to your total and will improve your score.
The credit score also factors in the diversity of your credit. If you only have one type of credit in your file, it could hurt your score. When you add a car loan to your account history, your credit diversity will improve, and you could see a bump in your score.
Finally, when you are looking to buy a car with low credit, it is essential that you can afford the payment. While paying the car loan off on time will help your score, falling behind on payments will hurt it.