You can find countless guides on the internet with tips for rebuilding credit. Many of those suggestions are perfectly reasonable and effective. For example, credit rebuilding guides often suggest taking out a couple of secured loans and working hard to get old items removed from your credit report.
These methods work. However, most people will see a substantial benefit from rebuilding credit through a car loan even with bad credit – here’s why.
You can only rebuild your credit when your payments are reported to the credit bureaus. Not all bills are reported. For example, utilities are almost always reported. Some cell phone companies report consumer payments to the credit bureaus, but only when you’re in a contract. If you’re making regular monthly payments on a prepaid plan, those payments probably won’t be reported.
Car loan payments, on the other hand, are always reported to the credit bureaus. No matter how small your loan is, it will be reported and your on-time payments will be credited toward bringing your credit score up.
A quick word of caution: be sure to calculate all interest payments before signing any paperwork so your payments are affordable. You don’t want to default on a car loan designed to rebuild bad credit from former defaults.
Similar to mortgage loans and student loans, your car loan will be reported to the credit bureaus as an installment account. Installment accounts typically consist of the same payment amounts each month made for a set number of payments.
If you don’t already have any installment loans on your account, getting a car loan (and making payments on time) can help improve your credit profile.
Using a car loan to rebuild your credit comes with a sweet benefit you may not have considered: the opportunity to get the car you really want to drive.
Use the opportunity to take out a decent loan (maybe $10,000) and get a car you’ll want to drive. Then, sell your old car and use the money to pay off as much of your loan as possible. For example, say you get $5,000 for your old car. Depending on your loan terms, you could pay back half your loan right away, or just make higher monthly payments if that’s more comfortable.
Just like initially building credit, you’ll need to create a little debt to rebuild credit. Although, you don’t need to borrow $25,000 to buy a new car. Even if you could get a car loan for that amount, with bad credit you’ll get a sky-high interest rate and spend far more money than you should. Considering that auto loan delinquencies are on the rise, you don’t want to risk falling behind again.
Find a small car loan to avoid putting yourself back in debt long-term. The ideal car loan will create short-term debt that you can easily pay back without missing any payments. Unless you can comfortably afford higher payments, only borrow enough to get a decent car. When your credit is better, you can get a nicer car.
Consider applying for $7,000 or less and buy a decent used car. There are plenty of car lots that sell cars for under $10,000 that will last for many years with minor expected repairs.
When you’re looking for a car loan, you’re probably going to need to apply for several different loans. Thankfully, multiple hard inquiries within a 30-day period will generally only count as one for the purposes of calculating your FICO score. So, don’t be afraid to check out your options and apply for the loans that will fit your needs.
Getting a car loan will help improve your credit as long as you make your payments on time and in full. Before agreeing to any loan terms, make sure you can afford the interest payments throughout the whole term of your loan.
Once you boost your credit score by establishing a history of on-time payments, you’ll have access to credit when you need it most. Most importantly, you’ll be prepared for emergencies.
If you are interested in even more business-related articles and information from us here at Bit Rebels, then we have a lot to choose from.
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