Author Topic: Should I finance a car to build credit?  (Read 8677 times)

Cwadda

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Should I finance a car to build credit?
« on: March 28, 2014, 09:35:27 AM »
Just wanted to get some opinions on this. I am buying a used car soon. If I get it from a dealership, should I take a financing option to build credit? I am 19 and the only credit I have is a credit card since Jan 2014 and a student loan that I've been making interest payments on since 2012. Have perfect credit thus far.  I have the cash for the car now (Approximately $5k). I really want to buy a house as absolutely soon as possible.

Should I try to finance the car if that option is available to build credit?

Forcus

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Re: Should I finance a car to build credit?
« Reply #1 on: March 28, 2014, 09:54:42 AM »
If the car is only $5k, then I assume that it is older and that with your limited credit history, the interest rate would be 10%+. It would help "build credit" but of course it would cost you. I don't think there is a magic formula that can tell you how much it would add to your credit score, if so you would be able to say, yes, the rate is high, but consider it a "required" fee to be able to buy a home down the road. So I know that didn't help but I'm hoping someone says there is a magic formula you can use to determine this.

HAULIN3

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Re: Should I finance a car to build credit?
« Reply #2 on: March 28, 2014, 09:59:28 AM »
I'm new here, but I'm old in life.  DON'T finance a car. Good job getting a used car!! You are in a great position at 19.  You CAN find a mortgage loan that doesnt require you to be in debt/have a credit score... Stick with paying for things with cash.. You will be better off...

ketchup

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Re: Should I finance a car to build credit?
« Reply #3 on: March 28, 2014, 10:04:42 AM »
Not unless you can get extremely low interest (<2%) without sacrificing any savings you'd get for paying cash.  On a $5k car with your credit history, I'd say either is unlikely.  The best thing you can do in your situation credit-wise is probably to keep making payments on time, and maintain responsible use of that credit card.  Unfortunately a lot of building credit is a waiting game.

Forcus

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Re: Should I finance a car to build credit?
« Reply #4 on: March 28, 2014, 10:05:49 AM »
You CAN find a mortgage loan that doesnt require you to be in debt/have a credit score.

I am not at all trying to be snarky but I've never heard of this (I am genuinely curious). I recall going to my local, well known credit union, working for a big name company, no debt, and they would not loan me ANY amount of money - ANY, like not even $100 at 15% interest - because I had zero credit and my creditd card didn't count. It's an issue if you need to have credit down the road - the home for example.

I am curious though if what you outlined actually exists without massive drawbacks - e.g. extremely high interest rate, etc.

lackofstache

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Re: Should I finance a car to build credit?
« Reply #5 on: March 28, 2014, 10:19:48 AM »
Get the loan. Pay the normal monthly payments for 12 months, then pay it off. Keep in mind you don't have to get the loan for the full purchase price, you can pay $2k down and borrow $3k. Even at 10%+ interest, it could help you save tons of money later. You need to build some credit unless you're going to pay cash for a home. A little bit of money in interest now is buying you credit, that will ultimately mean a lower rate on a mortgage.

frugalnacho

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Re: Should I finance a car to build credit?
« Reply #6 on: March 28, 2014, 10:26:44 AM »
Forget everything anyone has ever told you about "building credit".  It's all 100% bullshit.  Don't finance anything you don't have to.  You will do far better in life by not using credit than you you will by taking credit you don't need just to "build credit".

Cwadda

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Re: Should I finance a car to build credit?
« Reply #7 on: March 28, 2014, 10:28:12 AM »
Thanks for the replies. Does anyone know if it's possible to get a financing option and then pay it off completely the next month?

It would be ideal to buy a small house or condo by next year but I don't think it's possible with my low credit :/

HAULIN3

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Re: Should I finance a car to build credit?
« Reply #8 on: March 28, 2014, 10:38:12 AM »
Call Churchill Mortgage!  Talk to them a bit!  they know how to approve you for a mortgage based on ability to repay! they dont just look at whether you have a "credit score".  You can call them and just ask about their requirements.  Just my 2 cents based on reading I've done..

schimt

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Re: Should I finance a car to build credit?
« Reply #9 on: March 28, 2014, 10:47:40 AM »
I believe your credit history is based on length of history, financing a car and paying it off in one month will not build much "history". They are looking for continuous payment on time, among other things. There is usually up front fees with financing that you will pay, and it will not be worth those fee's to get one extra payment on your credit history.

GregO

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Re: Should I finance a car to build credit?
« Reply #10 on: March 28, 2014, 12:06:11 PM »
When I was 22, I went to a bank to get pre-approved for a mortgage.  I wasn't going to qualify because I thought I didn't have any credit history except for my credit cards.  When they pulled my credit report, I found out that my parents had actually put me on the loan for the car that they got me when I was 16 (it was only a $5k car).  I was very thankful that they had done that for me and was approved for a loan.  I didn't get a house then, but the next car I bought I borrowed about $5k on a $8k car (at 3%) and paid it off in a little over a year.  I just recently did buy a house, and my credit history made it possible for me to shop around with a lot of mortgage providers and find the best rate.

I am sure there are ways to get mortgages without a car loan, but having it will probably give you more options.  Also, you should be able to find a good rate on a loan if you look around.  It's not hard to qualify for a car loan, especially a small one like that.  Don't get the loan through the dealer though, shop around at banks and credit unions.  They will usually give you a better rate and have less fees. 

The other major benefit of getting a loan on the car is that the bank will check the paperwork closely and make sure you are getting all of the correct paperwork.  They have skin in the game and want to ensure that you are getting the vehicle (and pink slip) that you are supposed to get.

Other people have different opinions and you may have different experiences than me.  But my experience has convinced me that building some credit history will pay off many times over, especially if you want to buy a house soon.

phred

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Re: Should I finance a car to build credit?
« Reply #11 on: March 28, 2014, 12:09:50 PM »
Thanks for the replies. Does anyone know if it's possible to get a financing option and then pay it off completely the next month?

yes, you can do this

payitoff

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Re: Should I finance a car to build credit?
« Reply #12 on: March 28, 2014, 12:44:32 PM »
applying for a loan these days have changed tremendously, used to be a lender just looks at your credit score and you can get a loan based on how high your score is, nowadays, its more important to them to know if you really can afford the loan, with this said, there are lenders out there that looks at your ability to pay more than your low credit score.

it is valid for you to have a low score since you are only 19 yrs old and have not established the length of time of having a credit yet. but who needs credit when you have cash right? 

the same goes for buying a home, go to a credit union, ask about FHA loans, take a conservative route , overtime, your credit score will go up by itself even if you dont have existing loans.

Thegoblinchief

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Re: Should I finance a car to build credit?
« Reply #13 on: March 28, 2014, 03:24:29 PM »
I don't know what any of you are talking about. I got a mortgage without ever having a car loan.

My history was credit card and student loans. All fully current.

MissPeach

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Re: Should I finance a car to build credit?
« Reply #14 on: March 28, 2014, 04:03:56 PM »
Thanks for the replies. Does anyone know if it's possible to get a financing option and then pay it off completely the next month?

It would be ideal to buy a small house or condo by next year but I don't think it's possible with my low credit :/

Yes you can do it. I would just check to make sure there is no prepayment penalty first. In all the states I have lived in it wasn't legal but I would just ask in case it is legal where you live.

I would check with a credit union for the car loan. Most have first time buyer programs with a pretty low rate. Most the criteria for the loan is just to be a resident. Most banks and the dealers either wouldn't lend to me or charged me crazy interest (26%+%). I had purchased my first car at 10% interest with the note from the credit union (7% was standard at the time for excellent credit) and paid it off in a year. A few years later I had no issues getting a mortgage and my credit score was in the high 700s from the car. I was only 20 when I bought my first house so I didn't have credit length to help build my score.

I normally am in the no debt camp. Since mortgages vary in cost so much by bank, points, closing costs, etc. I would be willing to pay a little interest in order to have lots of options for something as big and expensive as a house. Prior to the car all I had were credit cards. 

AJ

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Re: Should I finance a car to build credit?
« Reply #15 on: March 28, 2014, 04:14:48 PM »
I don't think a car loan in necessary at this point to build your credit. As others have noted, as long as you don't have anything bad on your report, and assuming you have 2 years of job history and a down payment, I don't think you will have a problem qualifying.

But if you really want to, I suggest you pay for the car in cash, then finance a small amount after the fact - like $500. Pay on time for 6 months, then pay it off. It will help your score a bit, since it is a different kind of debt than the CC, but borrowing such a small amount will minimize the interest you pay.

One more thing to consider is insurance. A lender will require you to carry full coverage insurance. If you were going to pay for that anyway, no problem. But I personally would only carry liability on a car that cheap easily replaced, so that may increase your borrowing costs.

CarDude

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Re: Should I finance a car to build credit?
« Reply #16 on: March 28, 2014, 06:27:11 PM »
As lots of folks have said, no. Just use your credit card for daily expenses and pay it off in full each month. That'll give you more than enough of a credit history. In the mean time, keep spending less than you earn.

AccidentalMiser

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Re: Should I finance a car to build credit?
« Reply #17 on: March 28, 2014, 06:38:30 PM »
Let me ask you a better question. 

Why on earth would you want to buy a house??

Daleth

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Re: Should I finance a car to build credit?
« Reply #18 on: March 29, 2014, 09:46:41 AM »
Thanks for the replies. Does anyone know if it's possible to get a financing option and then pay it off completely the next month?

From what I've heard that makes no difference with car loans. In other words the payoff amount will include all the interest whether you pay it off now or two years from now. Car loans are different than other loans.

Joel

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Re: Should I finance a car to build credit?
« Reply #19 on: March 29, 2014, 10:46:14 AM »
Let me ask you a better question. 

Why on earth would you want to buy a house??

This.

Also depending on the term of the loan you can get, it may be worth getting the loan and paying it completely just so that there is a car loan on your credit history. It makes a significant difference quickly. My significant other barely had any credit two years ago, and now that she has a car loan and has made timely payments her score is significantly higher than mine. And I have just had credit cards for 8 years, plus paying in full my student loans. At the same time though, I would not pay significant fees to get a bump in my credit. Be patient and your credit will speak for itself. There is no rush to but a house. You are 19, enjoy life for awhile. You have no idea what may change in the near future. I thought I had everything figured out at 19, and let me tell you I did not. I'm sure everyone you talk to can attest to that.

Villanelle

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Re: Should I finance a car to build credit?
« Reply #20 on: March 29, 2014, 10:55:55 AM »
Thanks for the replies. Does anyone know if it's possible to get a financing option and then pay it off completely the next month?

From what I've heard that makes no difference with car loans. In other words the payoff amount will include all the interest whether you pay it off now or two years from now. Car loans are different than other loans.

This must depend on the loan, because that's certainly not the case all the time.  I had a car loan for a few months.  It was something like .9%, so I thought it was a great deal since I could do better than that by putting my money elsewhere.  But after a few months, I just hated having that loan, so I paid it off in full.  I'd guess I had the loan for maybe 3-4 months.  I did not have to pay all the interest that I would have paid over the full life of the loan. I paid the small amount that had accrued since the last payment and the principal, and that's it.  No prepayment penalty or anything else.  It was from a bank (USAA), not a dealership. 

Jamesqf

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Re: Should I finance a car to build credit?
« Reply #21 on: March 29, 2014, 11:50:36 AM »
I don't know what any of you are talking about. I got a mortgage without ever having a car loan.

My history was credit card and student loans. All fully current.

Same here.  And it was one credit card, and a relatively small loan ($6K, IIRC) that was paid off years early.

bikebum

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Re: Should I finance a car to build credit?
« Reply #22 on: March 29, 2014, 12:22:50 PM »
I also looked into a car loan to build credit. The best offer I got was a ridiculous 13.99% since I did not have any credit established other than a gas card my mom set up for me in high school. I got a credit card instead, put around $50 to $100 a month on it, paid it off before any interest accrued, and had a really good credit score in about 6 months.

The only issue was some lenders (for the home loan) required a minimum of 3 trade lines with at least 1 year history each. One of the lenders had actually reassured me 9 months before that 1 card with a good score was fine, but then said otherwise when I was ready to get the loan. They said it was a federal requirement. That doesn't make sense to me, because the lender I went with was unaware of that requirement. I ended up getting a 3.375% rate with 20% down, with only the gas card and about 9 months of good credit card history.

Based on my experience, I wouldn't mess around with car loans since it is so easy to build credit with a little credit card use. Watch out for the minimum trade lines though; that made me a little nervous.

bikebum

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Re: Should I finance a car to build credit?
« Reply #23 on: March 29, 2014, 12:36:30 PM »
Thanks for the replies. Does anyone know if it's possible to get a financing option and then pay it off completely the next month?

That may not help your credit much. I think lenders are looking for a lengthy history of payments.

The whole thing is stupid. I could go on a rant about how dumb it is that it is more difficult for a fiscally responsible person who avoids debt to get a mortgage than a typical debt lover. OK, no more complainy-pants shit.

Travis

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Re: Should I finance a car to build credit?
« Reply #24 on: March 29, 2014, 12:40:06 PM »
I just attended a credit class at work.  The guy didn't specifically say anything about getting a loan to jump start your score (if that's even possible), but you establish credit history by simply paying your bills on time and using and paying off your credit card (and keeping your debt/income ratio within a certain threshold).  The trick he did specify with this was to do three things. 1) Pay in full before any interest is applied 2) Use no more than 30% of your credit limit and 3) Use the card in one month, but wait until the next month to pay it off.  Your mileage may vary on that last point depending on your billing cycle, but apparently the credit bureaus see a difference if you buy something on credit on 15 March and wait until 1 April to pay it off.

Also, look at your credit reports and make sure they're spotless.  Even administrative errors like your name and address can complicate matters down the road.  If you need to shop around for loans, mortgages, or credit cards, do it all within a 30 day period.  Every time someone does a credit inquiry because you're trying to get something your score will take a hit.  Doing your loan/mortgage shopping in a short period makes it look like one inquiry instead of several.  And finally, don't close your oldest credit card account.  Even if the balance is zero and you never use it, lock it in a drawer.  Your credit score is also based on the credit history of that particular card.

bikebum

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Re: Should I finance a car to build credit?
« Reply #25 on: March 29, 2014, 02:45:17 PM »
3) Use the card in one month, but wait until the next month to pay it off.  Your mileage may vary on that last point depending on your billing cycle, but apparently the credit bureaus see a difference if you buy something on credit on 15 March and wait until 1 April to pay it off.

I have no idea how this works, but I paid off the majority of my credit card charges within a few days using my online banking. My score still went up into the high 700's pretty quick.

Someone told me that the credit bureaus take a snapshot of your account every so often, and if there is no balance they interpret it as the card not being used. I don't know if that is true, but my credit showed no balance most of the time since I paid it off so soon and my score still went up.

livetogive

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Re: Should I finance a car to build credit?
« Reply #26 on: March 29, 2014, 03:10:02 PM »
without going into the gory details, my vote is "no" simply because a car is generally a bad thing to finance and the interest rate will be nuts.  You already have debt with the student loans and can show consistent history with your credit cards. 

What if I asked "Should I finance a pool to build credit?"  "Should I finance a new wardobe to build credit?"  Those don't make sense, but for some reason society is OK with doing the same thing if it's a car.

Cwadda

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Re: Should I finance a car to build credit?
« Reply #27 on: March 30, 2014, 01:16:44 AM »
Thanks everyone! All of this is assuming I have the option to finance. Could very easily end up paying cash. My credit score was 666 before I got my credit card. Wonder what it is now...


fixer-upper

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Re: Should I finance a car to build credit?
« Reply #28 on: March 30, 2014, 01:23:22 AM »
Your student loans should be building your credit history, so the car loan may hurt more than help.

For most loans you can pay them off early, but always make sure to ask if there's an early payoff penalty.  Some banks will try to nail you with a $xxx fee if you pay off the loan too quickly.

Forcus

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Re: Should I finance a car to build credit?
« Reply #29 on: April 01, 2014, 09:49:52 AM »
So I guess the salient question is what is the most effective and efficient way to build credit.

tallen

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Re: Should I finance a car to build credit?
« Reply #30 on: April 01, 2014, 10:02:52 AM »
If you want to build your credit the best way would be with a secured credit card (or 2). Just be sure to pay the balance in full each month so you don't get charged interest as it's pretty steep. Look into cards that will "graduate" into normal credit cards after a year or 2 of on time payments (you'll get your deposit back). I'd advise against an auto loan as although it will help build your credit, it will mainly just help toward qualifying for...wait for it...another auto loan (insert facepunch here)

Cwadda

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Re: Should I finance a car to build credit?
« Reply #31 on: April 01, 2014, 07:50:09 PM »
So I guess the salient question is what is the most effective and efficient way to build credit.

Yes, but I'm doing as much as I can pretty much with what I've got. The car thing just came up so wanted to know how to go about it.

Never heard of the word salient..thanks for that.

bikebum

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Re: Should I finance a car to build credit?
« Reply #32 on: April 01, 2014, 07:52:49 PM »
If you want to build your credit the best way would be with a secured credit card (or 2). Just be sure to pay the balance in full each month so you don't get charged interest as it's pretty steep. Look into cards that will "graduate" into normal credit cards after a year or 2 of on time payments (you'll get your deposit back). I'd advise against an auto loan as although it will help build your credit, it will mainly just help toward qualifying for...wait for it...another auto loan (insert facepunch here)

Those "secured" cards crack me up. You basically borrow money from yourself and pay any interest to the credit card company. But you gotta start somewhere if you want to build credit.