Have you recently struggled with credit challenges but were still able to purchase a vehicle? Now is the time to take advantage of this opportunity to improve your credit score. By making payments on-time and establishing a good payment history, you’ll be able to get yourself back on track to improving your credit.
Learn how credit scores are determined
First, you must understand what factors are considered in calculating your credit score. There are many different factors that go into it, but these are the five most important in determining your overall credit score:
Payment history – Your record of on-time payments and any black marks, such as late payments, accounts sent to collection or judgments against you.
Credit utilization – How much of your available credit you’re using.
Credit history – The length of time you’ve been borrowing money.
How often you’ve applied – Or whether you’ve applied for a lot of credit recently.
Number and types of credit accounts you have – Do you have credit cards, installment debt — including mortgage and car loans — or a combination of each?
Build and establish good credit
Now is the time to show credit lenders that you’re making an effort to improve your credit, and the easiest way to do so is by always making your payments on time. Even one single late payment can set back your credit rebuilding strategy. If you establish a track record of making payments consistently over time, you will start to see your credit score improve.
If you have an auto loan that you’ve been regular about paying, you’ve benefited from the fact that this type of payment history weighs heavily in your scores. By paying it down, you’re also decreasing your credit utilization — unless you’re running up balances on other forms of credit — and that can hurt your score.
A car loan also diversifies the types of credit you have, assuming you have things like credit cards or perhaps a mortgage. Credit lenders like to see these installment accounts because they have fixed payments each month and often are secured by an asset. You don’t have to pay the account in full each month, but you must pay the required payment amount. In this case, the interest charges are built in at the start of the loan and usually paid off, over the life of the loan. Your ability to pay installment accounts, in addition to others, shows credit bureaus that you’re responsible enough to plan your finances around all these different types of credit.
Monitoring and managing your credit moving forward
Once you’re on track to rebuilding your credit, it’s important to keep an eye on how it’s doing so you don’t end up in the same situation. Here are some tips for managing your credit moving forward:
Check for inaccuracies – Now is the time to check your credit report for any mistakes and fix anything that isn’t being reported on correctly.
Watch out for identity theft – Some credit cards come with identity theft monitoring, but it’s also important to check your bank account for any suspicious activity that may have occurred when you used a debit card. Also, make sure you never give out any banking information over the phone or online as this is a common trick thieves use to steal your identity.
Don’t take out more credit than you need – While an important part of building up your credit score is showing that you can make payments on time. Applying for multiple credit cards in a row will only hurt your credit score.
Space out loans – If you do need to take out a loan for something like a costly home repair, try not to take out another one for at least a year. This can reflect badly to lenders since it looks like you’re struggling again financially.
Don’t max out your cards and try not to carry unpaid balances – This may seem obvious but it’s not only how many different credit sources you have but also how much credit you’ve extended. If you absolutely must put a purchase on a credit card, make sure that it’s something you can pay back right away and won’t have to pay interest on.
Set up automated payments – Eliminate the risk of forgetting to make your payments on time by signing up for automatic payment. You can set up payments directly with each individual company or you can schedule and manage all your payments through your online banking.
Build up your savings – This may not seem as obvious but the more money you’re willing to put away each month, the more money you will have if an unplanned expense comes up. This reduces the chance that you’ll have to take out additional loans to pay for it.
If you purchased your car from any of our three J.D. Byrider locations in the Columbus area, you’re in luck because we know that many of our customers are hoping to rebuild their credit. When you get a car loan through us and make your payments on time, we’ll let the credit bureaus know. With each payment, you’re on your way to building a better financial future.
What is My Credit Score? (n.d.). Retrieved from NerdWallet: https://www.nerdwallet.com/blog/free-credit-score/
How Is My Credit Utilization Ratio Calculated? (2016, October 24). Retrieved from NerdWallet: https://www.nerdwallet.com/blog/finance/how-is-credit-utilization-ratio-calculated
How to Use an Auto Loan to Rebuild Your Credit. (2015, June 12). Retrieved from Independent Insurance Agents: https://www.trustedchoice.com/f/p/how-to-use-an-auto-loan-to-rebuild-your-credit/