Having a car loan does not build your credit, paying it back does. If you are new to the big-boy-pants world, you may find that building a strong credit score can indeed be a tough road to hoe. After all, a healthy credit score is one that shows a person has a history of paying back loans on time. If you are a young adult, you may not have had much chance to do this, which leads you to wondering how you can get that history that some day will help you buy a home.
Establishing Credit Through Financing
While there are many ways you can go about this, perhaps the best, most-effective and least-costly, method is to get and then pay off a car loan – i.e., to finance a car. This is preferable to other entry-level credit vehicles such as credit cards, because car loans have lower interest rates and cannot be used compulsively. Of course, loan payments must be made on time and in full if you are to build and maintain a health credit profile. Missing even just a single payment can have severe effects on your credit, and of course your lender will be quick to repossess the vehicle for non-payment.
Now, of course, if you have no credit history, you may not be able to even get a car loan – at least not with an affordable rate of interest. If this is your situation, you will need to find a co-signer, save for a large down payment, or both. You can also obtain a secured credit card, which will build credit without the risks associated with a traditional credit card. For more information, please check out this post, specifically for borrowers with little to no credit history.
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