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Should I use a car loan to rebuild my credit?
I want to rebuild my credit, but I also need a set of wheels to get around. Is a car loan a good way to rebuild credit?
Eric Schad · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
Using a
car loan
to rebuild your credit might be the right move! However, it’s highly dependent on your current debt and credit score.If you have lots of debt and a low credit score (less than 660), taking out a car loan isn’t the best idea. You’ll just be digging yourself deeper in the hole.
You’d be better off using any extra cash to pay down your current debt—especially high-interest credit card debt—or remedy delinquencies on your credit report.
If you have a decent credit score (661 to 700), you can probably find a decent interest rate on a car loan. In this scenario, a car loan can help you slowly rebuild your credit—but only if you make payments on time and don’t miss any.
Regardless of your current credit, getting a car loan actually lowers your score by five to 10 points as your lender will pull a hard inquiry to ensure you qualify for the loan. A hard inquiry remains on your credit for 12 to 24 months before it eventually drops off.
If you decide to go ahead with a car loan, shop around several lenders to make certain that you get the best interest rate possible. And remember, you will also need to budget for other expenses—namely car insurance.
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- Gregory R.
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