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It is my opinion that you should buy a car before you buy a house. I am basing that on a few simple things, all of which come down to money.

A person’s credit score is built from five categories. A car loan addresses three of them that account for 60 percent of your overall FICO score: payment history, length of credit history, and types of credit used. By utilizing a car loan for at least 18 months prior to a mortgage application, you may boost your credit score by  100 points, possibly more. That assumes that you make the payments on time and had no credit history or below average credit to begin with.

Improved Credit Equals Lower Interest

Those 100 points may be the difference between a mortgage denial and approval. If you are approved for a mortgage, those 100 points would lower the interest rate you have to pay…significantly. Even if you only pay a single percentage point less, you can save $30,000 in interest over the life of a 30 year mortgage.

In addition to a car loan, you should obtain a credit card to further boost your credit score. Credit cards are considered a revolving credit line, while car loans are installment credit lines. By having both, you address the ”types of credit used” section of your credit score. If you keep the balance low, say under 25 percent of your credit limit, you will address another aspect of your credit score:  amounts owed. This accounts for an additional 30 percent of your score, so by making on time payments on a car loan and a credit card, you address 90 percent of your credit score.

The most important thing is that you make all of your payments on time, in full, and that you are never late or miss a payment. Even a single missed loan payment can take a devastating toll on your credit score. If you are preparing to buy a home in 18-24 months, and you are using a car loan to build your credit, consider putting your car payments on auto-draft. In this way, you can ensure that you are doing everything in your power to boost your credit score before applying for that mortgage.

 

About the author: Jerry Coffey

 

Jerry Coffey is the financial expert here at AutoFoundry.com. A recovered "debtaholic," he now preaches frugal-living and sound money management here and at Repaid.org, where he is the chief contributor. He works for a major automaker.

 

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