Having a poor credit score can have far reaching consequences in nearly every aspect of your financial life. Getting a job, a house, a car or even simply borrowing money can become near impossible tasks to achieve if you have poor credit scores. Because of the crippling effects that poor credit scores can have, it is imperative that you make every effort you can to improve them. Often, this calls for some discipline in your spending habits, or other adjustments to your financial life. But perhaps the best way to boost your credit scores is by financing a car. Sure, it is an added risk to the pile of debt you already have, but it can also work wonders for your credit score.
How can financing a car improve your credit score?
If you want to rebuild credit through financing a car, you need to understand how the credit system works. Generally, there are two major classifications of loans- revolving and installment loans. On one hand, revolving loans are those that are borrowed using credit cards. They are so named because every month, consumers will borrow a given amount of money, and they must repay it at one point or another. These loans are characterized by the fact that you can choose how much money you repay each month. You don’t have to pay the same amount of money every month, and you do not have to pay back all that you owe your creditor every month. With these loans, it is easy to let debt accumulate, which can have a negative impact on your credit score.
On the other hand are installment loans. Many people take installment loans when making large purchases such as a home, a car, or some other such property. With these loans, you are supposed to pay a fixed amount of money every month before a given date. Taking an installment loan to finance a car is advantageous to your credit score for several reasons. For one, your ability to repay such a high amount of money within the stipulated period will certainly contribute to the improvement of your credit score. Additionally, since the payments are already prefixed, it becomes much more difficult to fall back on payments.
How to rebuild credit by financing a car
1. Be certain you can afford the car
Rebuilding credit through financing a car is a double-edged sword. It is a risk that you would be taking because simply put, you would be borrowing more money when you are already steeped in debt. It is therefore important to be certain that you can afford the car in the first place before you choose this path to rebuild your poor credit. If you go ahead with financing a car when you can’t afford it, it will only be a matter of time before your scores plummet again.
2. Buy an affordable car
Keep in mind that one of the greatest motivations of purchasing the car is so that you can improve your credit score. This alone should inspire you to buy a car within your means. Additionally, choose the dealer from whom you purchase your car from with care. Since you have decided to rebuild credit through financing a car, make sure that your dealer reports your every payment to the credit bureaus. That is the only way that your credit scores will improve through financing a car. All in all, be sure to buy within your means, and remember, the newer cars may provide a manufactures warranty, adding additional peace of mind.
3. Pay on time
Lastly, aim at making all your payments in time. You certainly don’t want to rebuild credit through financing, which by itself is a huge risk, only to have your credit score drop simply because you didn’t make payments on time. To make it easier for you, you can choose to have the predetermined amount of money automatically withdrawn from your account. Additionally, even though paying back your loan as soon as you can save you some interest money, it is not great for improving credit scores. If your greatest aim when financing a car is to rebuild your score, then choose to pay smaller amounts of money over a long time. It is the only way that financing a car will make a significant difference to your credit score.