Author Topic: How much does a car loan REALLY benefit your credit score?  (Read 1861 times)

cats

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How much does a car loan REALLY benefit your credit score?
« on: December 01, 2015, 11:32:21 AM »
Here's the scenario:  We are 2 individuals with decent (high 700/low 800) credit scores.  A handful of credit cards between us, some with 10+ years of history, which we use regularly for pretty much all purchases and pay off on time.  One of us had a small (~$10k) educational loan, paid off about 5 years ago.

We do not own a house, so have never had to take out a mortgage.  We have also never used a loan to purchase a car as we've generally stuck with $2-3k used cars from craigslist or family members looking to unload their vehicles.  So aside from the one educational loan, there is nothing in our history to suggest we can chip away at a single loan consistently over time.

Right now we are looking at buying a (sensible, compact, used, to be used for driving non-walk/bikeable distances only) car for around $7k.  We have enough cash on hand to pay for it outright, but we could also get a 72 month loan at 2.24%.  My husband suggested maybe it would be a good idea to take out the loan, to "improve our credit scores", plus if the rate is suitably low it makes more sense to have money available to throw at the stock market (2.24% seems to be getting into the "suitably low" territory).  There is a moderate chance we will want to buy a house within the next 5 years.  While I have no doubt we could get approved for pretty much any amount of mortgage we would conceivably want, I would certainly be willing to pay a bit in interest on a car loan if it meant tens of thousands in savings on mortgage interest.  And this loan is not very large relative to our net worth--we would certainly have the means to pay the balance off in full at any time if we decided it was too much hassle to keep track of a monthly payment.

I guess my question is, given that we already have good credit numbers, just how much is the presence of a car loan (plus evidence of ability to pay it off over time) really going to improve the eventual interest rate we might be offered on a mortgage? Some internet searching I have looked at suggests you need a score of 760 or better to be offered a really good rate, but we are both quite comfortably over that cutoff.  Is there really a big difference between a score of, say, 810 and 820?

Fishindude

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Re: How much does a car loan REALLY benefit your credit score?
« Reply #1 on: December 01, 2015, 12:08:19 PM »
Credit scores are highly over-rated numbers tossed around mostly by folks that borrow money all the time.

Sounds like you guys are in good shape, I wouldn't worry about your credit score too much.

shotgunwilly

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Re: How much does a car loan REALLY benefit your credit score?
« Reply #2 on: December 01, 2015, 12:29:19 PM »
Your credit scores aren't "decent," they're already in the excellent category.  You will get the best rates with those scores, so your car loan will probably do nothing.  Either way you go wouldn't change a thing IMO.

gliderpilot567

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Re: How much does a car loan REALLY benefit your credit score?
« Reply #3 on: December 01, 2015, 12:41:16 PM »
Quote
we would certainly have the means to pay the balance off in full at any time if we decided it was too much hassle to keep track of a monthly payment.

In that case, I recommend you do this and pay off the balance in full right at the beginning (i.e. pay cash, or the 100% down payment plan), and save yourself the hassle forever. Taking 6 years to pay off a $7000 car seems silly to me, no offense.

Credit scores are voodoo-magic. They do matter, sorta, but if your scores are already as high as you say, it probably won't make a difference in what interest rate you'd get on a mortgage. And if you do get a higher than desired mortgage rate, then just pay it off early and you'll save a boatload of interest anyway.

cats

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Re: How much does a car loan REALLY benefit your credit score?
« Reply #4 on: December 01, 2015, 12:45:24 PM »
Thanks for the input!  It's so hard to judge some of this credit score advice sometimes because you know it's targeted at people with completely different financial habits.  And I agree that credit scores largely seem to be a matter of voodoo magic!

robartsd

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Re: How much does a car loan REALLY benefit your credit score?
« Reply #5 on: December 01, 2015, 12:59:44 PM »
By paying cash for a car you avoid lender required insurance coverages; so depending on your risk tolerance, you could save more than just the interest. While an installment load would be helpful to your credit score (particularly for the partner who did not have a student loan); your credti score does not really need the help.

acroy

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Re: How much does a car loan REALLY benefit your credit score?
« Reply #6 on: December 01, 2015, 01:16:08 PM »
Your credit is excellent - no worries there.

However, if you can finance for 2.x%, I'd say do it. Vanguard corporate bond fund is yielding 4.x%. Let that car actually make you a little money :)  It is worth checking the insurance requirement... But this has not been an issue for us.