Author Topic: Should I take out a car loan solely to boost my credit score?  (Read 5779 times)

pinkfloyd4ever

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Should I take out a car loan solely to boost my credit score?
« on: October 26, 2015, 12:01:49 PM »
So Iím selling my car and buying one thatís more reliable than my current 2012 Chevy Cruze but worth less money. Looking for the best Mazda 3 or Honda Civic I can find in the $9-10k range. Any recommendations on the car itself?

Anyway, my wife & I are planning to buy a house in the next 1.5-2 years.  My credit history is limited to $6k in credit card debt a few years ago (now down to under $1k, will be zero in about 3 months) and a bunch of student loans. So Iím wondering if it would be worthwhile to take out a loan for my new (old) car and pay it off in a month or 2 in the interest of boosting my credit score? Or would it not change my credit score much without carrying a balance for a year or more? Btw, where do you guys suggest checking your credit score?

Catbert

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #1 on: October 26, 2015, 12:11:14 PM »
Go to myfico.com to get your FICO score.  It costs around $15.  Don't rely on on the free places that give you a FACKO score which is a guesstimate of what your FICO score might be.  Even then remember that there are a numerous variations of FICO scores.  The mortgage algorithm is somewhat different than what a credit card company would get.

I don't think that getting a car loan for a month or two would help any.  Maybe one cc (each?) to use lightly and pay off monthly if your score needs help.  If you cc and SL debt doesn't show any late payments you might be fine. 

Jeremy E.

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #2 on: October 26, 2015, 12:21:51 PM »
I think the best value cars currently are the 2011 Nissan Leaf, 2011 Nissan Versa, and 2005 Toyota Corolla.

Rubic

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #3 on: October 26, 2015, 12:32:36 PM »
Applying for a car loan (which in itself is a very non-Mustachian option) will generate a hard pull on your credit -- multiple credit pulls if you shop around. Credit card churners tend to lay off applying for credit until after they've secured their mortgage loan.  It takes about 2 years for a hard pull to drop off your credit report.

In the meanwhile, you need to get your credit card debt down to zero and keep it there.  Your credit utilization (% of credit balance compared to your credit limit) has a major affect on your score.  Fortunately, it's one of the easiest to fix -- pay off your balance!

Contra mary w, I'd say go ahead and sign up for creditkarma.com.  Mary is correct that it's considered a FAKO score, but it will let you know if you're in the right ballpark and it's free.  When you get closer to buying a house, you can pay for an actual FICO score.  Some credit card services will provide you with your FICO score for free.


nereo

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #4 on: October 26, 2015, 12:40:10 PM »
So Iím selling my car and buying one thatís more reliable than my current 2012 Chevy Cruze but worth less money. Looking for the best Mazda 3 or Honda Civic I can find in the $9-10k range. Any recommendations on the car itself?

Anyway, my wife & I are planning to buy a house in the next 1.5-2 years.  My credit history is limited to $6k in credit card debt a few years ago (now down to under $1k, will be zero in about 3 months) and a bunch of student loans. So Iím wondering if it would be worthwhile to take out a loan for my new (old) car and pay it off in a month or 2 in the interest of boosting my credit score? Or would it not change my credit score much without carrying a balance for a year or more? Btw, where do you guys suggest checking your credit score?

Taking out a car loan won't do much to help your credit score - and it may hurt it.
Your FICO score is calculated based on various factors, but the most important ones are
1) ratio of available credit to extended credit (about 30%)
2) history of credit repayment (have you ever missed a payment) (about 35%)
3) Length of credit history (about 15%)
4) any new credit (about 10%)
5) Credit mix (about 10%)

1.5-2 years isn't much to move the needle on 2 or 3m and it may be a ding against 1 and 4 if you still have some of the loan when you apply for a mortgage. 

The best thing you can do is to continue paying your bills on time every month (helps #1-4).  Beyond that, you may want to call your credit card companies and ask if you can have your credit limit extended.  This will ding your credit slightly for a few months (#4 new credit) but will ultimately help you because you will have a higher ratio of available credit (#1). 
Also check that there isn't anything erroneous on your credit report (it's amazing how often there are mistakes or fraud).

Agree with Mary W that checking your actual credit score is a great first step. If it's over 720 there's no need to change anything  - you will qualify for the best loans.

Drifterrider

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #5 on: October 26, 2015, 01:26:58 PM »
So Iím selling my car and buying one thatís more reliable than my current 2012 Chevy Cruze but worth less money. Looking for the best Mazda 3 or Honda Civic I can find in the $9-10k range. Any recommendations on the car itself?

Anyway, my wife & I are planning to buy a house in the next 1.5-2 years.  My credit history is limited to $6k in credit card debt a few years ago (now down to under $1k, will be zero in about 3 months) and a bunch of student loans. So Iím wondering if it would be worthwhile to take out a loan for my new (old) car and pay it off in a month or 2 in the interest of boosting my credit score? Or would it not change my credit score much without carrying a balance for a year or more? Btw, where do you guys suggest checking your credit score?

You can ask your bank to run a credit report for you for free (the question is free, the report might not be).

NEVER borrow money to "boost" your score.  You may have a limited credit history but a great FICO based on your income and debts.

Ask your bank first.  That much is free.

Paul der Krake

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #6 on: October 26, 2015, 01:31:40 PM »
This really should be put in the FAQ. It's one of the most pervasive myths that float around popular personal finance sites/blogs. It does NOT apply to anyone with a modicum of discipline.

Rubic

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #7 on: October 26, 2015, 01:43:24 PM »
Beyond that, you may want to call your credit card companies and ask if you can have your credit limit extended.  This will ding your credit slightly for a few months (#4 new credit) but will ultimately help you because you will have a higher ratio of available credit (#1).

It varies by credit card.  I could get my Amex credit limit raised without a hard pull, but not my USAA Mastercard.  OP may want to check with his credit card company first, before making the request.

lbmustache

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #8 on: October 26, 2015, 04:24:05 PM »
I am going to disagree with posters here.

I have a PERFECT credit history. 795-801 score (yes, FICO, not FAKO, looked at all 3 agencies), $6k credit limit, average age of account is 4 years. Balance is always paid off, I have less than 1% utilization currently. No liens, no collections, no bankruptcies, nothing.

Income is approx $5000 gross/month.

I got denied for several car loans, and got quoted high interest rates from others (5%+) because I had a "low" credit limit and "short" credit history. They told me that I was a "high risk" because they couldn't ascertain whether or not I could handle a loan amount (which is like... $15k. Nowhere near the amount of a house). I had a 30% downpayment on the car.

They told me that my high FICO did not matter because of my low credit limit and short credit history.

I have 3 hard pulls on my credit report now which dropped my score to 765 (which is still pretty high anyway).

I would recommend getting the car loan to establish credit history. This car loan process was a nightmare, I can't imagine what the house approval would have been like.

They told me I needed to have a payment history of at least 10-12 months to show that I can pay stuff off. I don't think paying a loan off in 2 months would do you any good.

Just my experience.
« Last Edit: October 26, 2015, 04:26:03 PM by lbmustache »

Rubic

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #9 on: October 26, 2015, 06:10:46 PM »
@lbmustache:  You may have a good credit history, but you've got a very low credit limit of $6K(*)  I've been churning CC's and never had CL on a single card that low.  My third Citibank AA card (50K bonus miles) was $6.7K, but that's only because I already have > $30K CL with Citi and didn't bother to request for the credit limit to be increased.

Is the source of your income easily verifiable?  Aside from a low CL, I can't see anything obvious that would preclude you from a car loan.

My suggestion would be to increase your credit limits while minimizing hard pulls on your credit, but I still wouldn't recommend carrying a balance on a car loan.

----

* Not a judgement, just an observation.

lbmustache

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #10 on: October 26, 2015, 06:18:34 PM »
@lbmustache:  You may have a good credit history, but you've got a very low credit limit of $6K(*)  I've been churning CC's and never had CL on a single card that low.  My third Citibank AA card (50K bonus miles) was $6.7K, but that's only because I already have > $30K CL with Citi and didn't bother to request for the credit limit to be increased.

Is the source of your income easily verifiable?  Aside from a low CL, I can't see anything obvious that would preclude you from a car loan.

My suggestion would be to increase your credit limits while minimizing hard pulls on your credit, but I still wouldn't recommend carrying a balance on a car loan.

----

* Not a judgement, just an observation.

I've purposely kept the limit low. I didn't have a need for anything more than $6k. Of course I get punished for not partaking in the debt system! And yes, the source of my income is easily verifiable, I work for the state as a teacher :)

I opened a new credit card through a credit union for $6k since they already did a hard pull for the car loan. Lesson learned about this whole process. Ugh.

nereo

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #11 on: October 26, 2015, 06:30:42 PM »
@lbmustache:  You may have a good credit history, but you've got a very low credit limit of $6K(*)  I've been churning CC's and never had CL on a single card that low.  My third Citibank AA card (50K bonus miles) was $6.7K, but that's only because I already have > $30K CL with Citi and didn't bother to request for the credit limit to be increased.

Is the source of your income easily verifiable?  Aside from a low CL, I can't see anything obvious that would preclude you from a car loan.

My suggestion would be to increase your credit limits while minimizing hard pulls on your credit, but I still wouldn't recommend carrying a balance on a car loan.

----

* Not a judgement, just an observation.

Just a guess, but to me this sounds like car financing guys jerking him around.  Dealerships can make more profit on the car loan than they do on the actual car sale.  I've read reports of them finding any excuse to deny even qualified buyers the best rate.  Consumer Reports warns against this, and I remember watching some 'sting' journalism where they showed black customers with great credit history get worse rates than white individuals.  Shrug... maybe this was it.. maybe not.

@lbmustache - only other observation I have is that you say you intentionally have kept your credit limit low but then complain about getting 'punished' by the credit system for not taking out more credit.  I don't want to sound like a jerk, but you can't play both sides... denying credit advances and then complaining that you don't have enough credit.

Rubic

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #12 on: October 26, 2015, 07:02:48 PM »
Just a guess, but to me this sounds like car financing guys jerking him around.  Dealerships can make more profit on the car loan than they do on the actual car sale.

@nereo:  Yes, I overlooked the most simple, obvious explanation.  Another reason to avoid financing your car.

hyla

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #13 on: October 26, 2015, 10:44:39 PM »
credit karma has a pretty good credit score change simulator where you can get estimates of how certain actions (opening new credit card, taking car loan, changing credit limit, missing a payment etc.) would change your score.  Yes, it's an estimate, not a real FICO score, but in my experience their estimates have been pretty close. 

I don't think taking a car loan is a great idea - number and mix of credit accounts is a relatively small percentage of your score.  The big ones are utilization and payment history.  You can lower your utilization ratio and improve your score quickly by either reducing your utilzation (pay off existing debt, then once that is taken care off, always pay off monthly and try to never use more than ~10% of your limit) or increasing your limit (apply for another credit card, or ask for a limit increase on your existing card - but obviously ONLY do this if you won't use the increased limit as an excuse to increase spending). 

lbmustache

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #14 on: October 27, 2015, 12:19:29 PM »
@lbmustache:  You may have a good credit history, but you've got a very low credit limit of $6K(*)  I've been churning CC's and never had CL on a single card that low.  My third Citibank AA card (50K bonus miles) was $6.7K, but that's only because I already have > $30K CL with Citi and didn't bother to request for the credit limit to be increased.

Is the source of your income easily verifiable?  Aside from a low CL, I can't see anything obvious that would preclude you from a car loan.

My suggestion would be to increase your credit limits while minimizing hard pulls on your credit, but I still wouldn't recommend carrying a balance on a car loan.

----

* Not a judgement, just an observation.

Just a guess, but to me this sounds like car financing guys jerking him around.  Dealerships can make more profit on the car loan than they do on the actual car sale.  I've read reports of them finding any excuse to deny even qualified buyers the best rate.  Consumer Reports warns against this, and I remember watching some 'sting' journalism where they showed black customers with great credit history get worse rates than white individuals.  Shrug... maybe this was it.. maybe not.

@lbmustache - only other observation I have is that you say you intentionally have kept your credit limit low but then complain about getting 'punished' by the credit system for not taking out more credit.  I don't want to sound like a jerk, but you can't play both sides... denying credit advances and then complaining that you don't have enough credit.

No, I was denied through major banks like Bank of America. I was approved by my credit union and Honda. Well anyway I learned my lesson and upped my credit limit to 12k because of this bs.

Kroaler

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #15 on: October 27, 2015, 03:18:02 PM »
I "think" I read somewhere that the chevy cruze was a pretty good car.   

Not really helpful I guess....

pinkfloyd4ever

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #16 on: October 27, 2015, 08:54:10 PM »
I "think" I read somewhere that the chevy cruze was a pretty good car.   

Not really helpful I guess....
ha, I can't figure out if this is sarcasm or not.

The Cruze is on CR's short list of the "Worst of the Worst" cars to buy, new or used. I've taken it to the dealer for 4 or 5 recalls since I started driving it 3 years ago. Everything about it feels shitty. The climate control smells like a mattress that has been sitting in 6" of water for months when you turn the A/C compressor off, which I guess is why it's always on when the auto temp control is, even when it's 10 degrees out and dry as the Sahara. The transmission randomly jolts when driving down the highway at a steady speed and I only get about 26 MPG. It's only a matter of time before I start having major problems with it. If you seriously read that the Cruze was a pretty good car, it had to have been written by someone either on bath salts or getting paid by GM.

As far as the loan, thanks for clearing that up everyone. I'll just sell the Cruze then buy something else outright.
« Last Edit: October 27, 2015, 09:20:21 PM by pinkfloyd4ever »

Kroaler

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Re: Should I take out a car loan solely to boost my credit score?
« Reply #17 on: October 27, 2015, 09:25:22 PM »
Wow I was in fact very wrong,  not about reading it, I did read that somewhere but it obviously wasnt credible cause here is the article from Lemon Aid.

Lemon Aid manual clearly list the Cruze as "not recommended"   so yeah looks like your sporting around in  a less then desirable automobile.