How Buying a Car Can Help Improve Bad Credit

how buying a car improves bad creditNot only are cars useful for taking you to your job or on vital errands, but purchasing one can be an important first step towards building credit.

How Credit Scores Work

When you have a poor credit history, you may feel reluctant to take on a large amount of debt such as an auto loan. Debt is crucial to building credit. Those who have never borrowed money will have a very limited credit history, with almost as low of a score as someone who has had a troubled borrowing past.

A line of credit such as an auto loan will allow you to demonstrate borrowing power. Making payments on time and paying off your loan in the predetermined time frame will show to lenders and credit reporters that you are financially responsible. Your credit score will likely increase as a result.

Other Ways Auto Loans Help Build Credit

Auto loans have some of the most flexible options available. A car is a middle step between something much more expensive like a house and something easy to get credit for but ultimately unnecessary, such as a couch or HDTV.

Your auto loan will also add to your credit history. Financial actions you have taken recently are large factors in credit score calculations; so are the ones you have taken in the past. Buying a car and successfully paying off your loan will be carried around with you forever, providing a bright spot on your credit record.

Not just any car loan will help you, though. One should always exercise diligence before jumping into a significant amount of debt. Here are some of the best strategies for finding a car loan that will help you build credit.

Shop Around

With bad credit, you are more likely to get a high interest rate. To try and avoid getting stuck with an unreasonable rate, always shop around for the best loan possible. Consider sources such as:

  • Dealership financing
  • Private banks
  • Credit unions
  • Auto loan specialists
  • Online auto loan services

Pay Off Your Loan as Quickly as Possible

Never fail to make your payment on time. Also, if you have extra cash then put it towards and larger amount for your monthly payment. More of the money you spend will go to your principal and your loan will get paid off faster.

Get a Cosigner

If you have truly bad credit and you are unable to get a loan, find someone with better credit who would be willing to cosign a loan with you. They will get you a more favorable rate and you will be helping their credit once the loan is paid off.

Start a Savings Account

Put any emergency funds you may have into a savings account that yields high interest. This will help you build credit even further. You could always use the reserve cash to make a monthly payment when money is tight.

With these smart practices, you will be able to secure a car loan that will help redeem your past credit blemishes. Your car loan could just be the single most important factor in getting you to your destination: a better financial standing.

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