Do Car Payments Help Credit Scores?

Car dealers love to advertise their "Credit Improvement Programs." Most of the dealers that embrace these "programs" are buy here/pay here dealers that charge high interest rates. Therefore, car payments help credit scores only when you get a loan with a reasonable rate, payments that you can reasonably afford and a term that repays the loan well before the car begins experiencing higher repair costs.

FICO allocates 35% of the weight of credit scoring to payment history. That confirms that a perfect payment history on a car loan will improve your credit. However, FICO also allocates 30% of the credit scoring formula to balances. That means that your scores will suffer from the debt of a car loan until you are able to repay most of it. Finally, with 10% of credit scores depending on new credit, your credit application will likely cause an initial drop in your credit scores of 1 to 5 points.

It sure sounds good that you can build your credit while paying for the car. After all, that is how most other smart consumers do it. However, taking on a car loan with terrible terms means that you will likely miss payments or default on the loan at some point in the future, thereby causing even more harm to your credit and perpetuating the cycle of bad credit and high debt.

Credit improvement programs are a backwards approach to building credit. The purpose of building credit is so that you can buy the big ticket items that are difficult to purchase without credit and repay those loans with the lowest possible interest rate.

Credit improvement programs do the opposite. They apply the highest possible interest rate and borrowing costs to the biggest purchase you have ever made. The result is that you may be paying double for a car if you ever finish paying off the loan.

It stands to reason that if you are unlikely to repay the loan on time with a perfect payment history, then you should expect to cause more damage to your already weak credit rating. You can also expect more bad loans on future car purchases.

One way that car payments help credit is to purchase a much cheaper car and only finance a small amount. Dealers rarely offer the best deals on cars priced less than $5,000, so it is advisable to at least consider cars sold by owners in addition to what you find on sale at car dealers.

A car loan for a couple thousand dollars will not cause undue hardship even if it does have a high rate of interest. Set up an automatic payment plan through your bank to make sure that all payments are made on-time. Buy starting small, you can reduce your borrowing costs while allowing your car payment history to positively report to the credit bureaus. Of course, it helps to use traditional lenders that normally report to credit bureaus instead of buy here/pay here credit that normally only reports when you miss payments.

Shop around for an inexpensive car and shop around for the best rate. Car loan approval is easier when the amount that you are requesting is a lesser amount that you are more likely to be able to repay. Your economical purchase now will allow you receive a much lower rate on your next car, since car payments help credit scores increase when you are able to afford the loan and maintain on-time payments.