Rebuild Your Credit Score by Purchasing a New or Used Car

Rebuild Your Credit Score by Purchasing a New or Used Car

Posted on July 7, 2020

Bad credit scores can happen for a variety of reasons, such as job loss, accidents, or medical bills causing someone to fall behind on their debt payments, declare bankruptcy, and more. Once negative information (such as a missed payment) is reported to the credit bureaus, it remains on a person's credit score for up to seven years. It is difficult to climb back up the credit score ladder, but there are two big things that can be done to rebuild a credit score--buying a new or used car or buying a house.
 

Buying a Used Car

 

 
An auto loan is an installment loan, which is one of the best ways to demonstrate good payment habits and rebuild bad credit scores. The purchase of a used car can increase a credit score, if payments are made on time. Here are a few things to consider.
 

Find a Good Dealership

 
Buyers should only buy a car from a reputable car dealership. This provides a higher chance that the car is in good condition, that there will be different loan programs (even for those with bad credit scores), and that the payments made will be accurately reported to the credit bureaus.
 

Consider the Budget

 
Buyers should stay well within their budget when purchasing a car. A bigger loan does not mean better--a bigger loan only means that the monthly payments will be higher. This could lead to difficulty paying, missed payments, and an even lower credit score.
 

Bring a Down Payment

 
Buyers should provide a decent down payment on their purchase. This will help reduce the monthly payment amount, as well as possibly allow buyers to qualify for a lower interest rate on their loan. It shows that buyers have the ability to diligently save money each month and can afford a car loan.
 

Find the Right Loan

 
A bad credit score means that buyers are more likely to be denied for a loan or a lease because it sends a signal to lenders that someone is a risky investment and has a poor history of paying people back. This often locks people out of low interest loans--instead, people with bad credit scores will be charged more money in order for the lenders to protect themselves against a potential loss.
 
It is important to consult with different banking institutions as well as different car dealerships to figure out what loan programs they offer to people with poor credit. And be sure to lock down the loan terms before driving off the lot with a car to ensure that the terms are not changed.
 
But high interest car loans do not have to last forever. Just like mortgages can be refinanced, so can auto loans. After a year of making the monthly payment early or on time, your credit score will hopefully improve. This will allow you to get better financing, lower the interest you are paying, and reduce the monthly payment.
 
An auto loan contributes to the mix of factors examined as part of a credit score. Buying a new or used vehicle can help to repair the damage and rebuild a credit score.

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