using an auto loan to repair credit?

[easytoremember]

So within the next month or so I'm buying a new (used) car. I can pay for it in cash, but as I'm trying to rebuild my credit I'm thinking about taking out an auto loan for it and keeping it for a couple months before paying it off in full. I was approved for the loan already.

My question is would taking a loan and paying it off early help rebuild my credit? I understand getting an open line of credit like a credit card from an agency that reports monthly will be the best way, but I don't want a credit card yet. So how many months should I keep the auto loan, or would it help at all?
I do know there are no prepayment penalties with the loan too.

[BoosTT]

Kinda a waste IMO. It might help, but not much unless its over a year loan. Just get a credit card and ask for a $500 or $250 limit.

[Wagonbacker9]

I was told (by a car dealer mind you) that paying off a loan within 6 months will actually hurt your credit. My theory would be to hold the loan open and pay 2-3x the payment in your situation. Let the rest of your cash on hand sit somewhere where it'll at least balance some of the interest you're paying.

[05caddyext]

The only way to really build good credit is to keep the loan to term. Paying it off quickly won't do anything for you, and as stated might actually hurt you. If you want to build credit you need to have several accounts open and keep a great paying history, never miss or be late. Just don't apply for to many things in a short time, get something, wait, get something else, keep all the accounts open.

[Crawlin]

you don't have to keep it to TERM, but close to it as possible. If you pay it off early in alot of cases it would seem as if you just sold it, not really paid it off.

Biggest thing to do, put down whatever is necessary for the car if anything, then take half of what you have cash and put it on a secured credit card. Put all groceries and gas bills on the card and just pay it off every month.

When I was a finance manager in the car business specializing in sub prime loans, this was all that I could say to people to help build their credit back up. If you have any collections, just go and get them paid. You guys have no idea how bad I've seen people's credit hurt because they can't stay off their damn phones, so they have collections from each one of the major phone accounts after they shut their service off. Phone don't work, these people just stop paying and then watch them plummet 200 points because they can't pay it off.

Even with what I said, it's not an instant jump, but it's all that you can do to a point.

[Crawlin]

you don't have to keep it to TERM, but close to it as possible. If you pay it off early in alot of cases it would seem as if you just sold it, not really paid it off.

Biggest thing to do, put down whatever is necessary for the car if anything, then take half of what you have cash and put it on a secured credit card. Put all groceries and gas bills on the card and just pay it off every month.

When I was a finance manager in the car business specializing in sub prime loans, this was all that I could say to people to help build their credit back up. If you have any collections, just go and get them paid. You guys have no idea how bad I've seen people's credit hurt because they can't stay off their damn phones, so they have collections from each one of the major phone accounts after they shut their service off. Phone don't work, these people just stop paying and then watch them plummet 200 points because they can't pay it off.

Even with what I said, it's not an instant jump, but it's all that you can do to a point.

[easytoremember]

hmmm, all interesting information. but I'd like to see something showing how paying off a loan early hurts you... that's the one part I fnid hard to believe, and possibly wrong.

[DynoTom]

hmmm, all interesting information. but I'd like to see something showing how paying off a loan early hurts you... that's the one part I fnid hard to believe, and possibly wrong.


I think for building credit it would hurt you more. I pay off early on every loan and I had a I have a 845 score. The last loan I got the finance guy told me that with such a long history of good credit doing things that might hurt someone trying to build a credit score would not matter as much for me.

[PureSound15]

Paying off a loan early does, in fact, often hurt your score.

Better way to build credit is to do a cd secured loan. Basically you get a loan for 1000 over a 24 month period - make that payment and pay the small rate. At the same time you're given a CD worth 1000 that is also earning interest (which offsets your interest on the loan).

At the end of 24 months of payments your cd matures and you'll earn a couple points.




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[Crawlin]

Paying off a loan early does, in fact, often hurt your score.

Better way to build credit is to do a cd secured loan. Basically you get a loan for 1000 over a 24 month period - make that payment and pay the small rate. At the same time you're given a CD worth 1000 that is also earning interest (which offsets your interest on the loan).

At the end of 24 months of payments your cd matures and you'll earn a couple points.




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take the advice from the banker ^^^^^

as for the paying it off early, a credit report is looking for pay history. it's looking for your ability to consistantly pay your bills. If you only have it for two months, how does that show anything about you paying your bills other than maybe you ran into some money? i know its weird to think of. I guess I wouldn't say HURT credit, but doesn't help it as much as paying it consistantly over the course of the term

[FoxStang]

Paying off a loan early does, in fact, often hurt your score.

Better way to build credit is to do a cd secured loan. Basically you get a loan for 1000 over a 24 month period - make that payment and pay the small rate. At the same time you're given a CD worth 1000 that is also earning interest (which offsets your interest on the loan).

At the end of 24 months of payments your cd matures and you'll earn a couple points.




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Sounds like an interesting idea, but how will interest payments possibly match up to earned interest? Yield matching isn't possible short of at the institutional level.

[-stew-]

Paying off a loan early does, in fact, often hurt your score.

Better way to build credit is to do a cd secured loan. Basically you get a loan for 1000 over a 24 month period - make that payment and pay the small rate. At the same time you're given a CD worth 1000 that is also earning interest (which offsets your interest on the loan).

At the end of 24 months of payments your cd matures and you'll earn a couple points.




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I asked someone at my bank about doing that; she told me they only do CD's for $5000 or higher. I asked her about putting $2000 down on a $3000 loan for a motorcycle with a blue book value of $4500; she told me it was too old. I asked her about a secured credit card; She told me they no longer offered those. When I asked her if they offered anything services for someone looking to improve their credit score; she simply said no and gave me a look that I interpreted as meaning "we're done here." She never asked my credit score, what the issues were, never ran a credit check on me.

[Dr.Buick]

I asked someone at my bank about doing that; she told me they only do CD's for $5000 or higher. I asked her about putting $2000 down on a $3000 loan for a motorcycle with a blue book value of $4500; she told me it was too old. I asked her about a secured credit card; She told me they no longer offered those. When I asked her if they offered anything services for someone looking to improve their credit score; she simply said no and gave me a look that I interpreted as meaning "we're done here." She never asked my credit score, what the issues were, never ran a credit check on me.

I guess I would be looking in to a new bank! Have accounts at more than one bank! Not all banks offer same loans, Min amounts on CD'S or money markets. Sit down and talk to bankers too see what they think! Assocated bank has been real good to me over the last 20 years.

[michelle]

She never asked my credit score, what the issues were, never ran a credit check on me.

Because you're black.

[GHOSST]

You need to new bank stew!!!

Well, from experience having credit and consistently paying it off over time helps with the rebuild process. There's nothing like checking your credit score and seeing green across the board for months. I took out a consolidation loan knowing I had the money to pay it off, and with discipline over time not wasting that money on other things, I paid it off over the course of a year or so give or take, and my score jumped up 60 points when I paid it off. Now I've got a few smaller loans in the works paying them off over time... I'm trying to reach the low risk category!

[PureSound15]

For consumer loans and or consumer savings at a combined income of $100k or less - you should be banking with a credit union. There aren't enough balances and or transactions with smaller banking relationships for the institution to make money - thus, they make it hard for you.

Yield matching isn't exact and it doesn't come out break even. BUT you end up paying very, very little for your credit repair and it's also basically a forced saving account which is good for the average guy that has difficulty managing money.


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[-stew-]

Because you're black.

http://i130.photobucket.com/albums/p249/stewsquarenuts/beingblack.jpg

[easytoremember]

well from what I was able to find out repayment hisotry only accounts for 35% of your total score. Among the other factors are debt to income ratio, minimum payment to income ratio. length of open credit lines, number of open credit lines, number of inquiries, among other factors as well.

I started tracking my score every month so I guess we'll see what happens. I'lll probably post an update when all is said and done. Thanks for the info everyone.

[05caddyext]

why does your credit need rebuilding? bankruptcy? not paying? why is your credit bad? what's your current score? whats your ultimate goal?

[FoxStang]

For consumer loans and or consumer savings at a combined income of $100k or less - you should be banking with a credit union. There aren't enough balances and or transactions with smaller banking relationships for the institution to make money - thus, they make it hard for you.

Yield matching isn't exact and it doesn't come out break even. BUT you end up paying very, very little for your credit repair and it's also basically a forced saving account which is good for the average guy that has difficulty managing money.


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Out of curiosity where do you work, and what aspect of banking are you involved in?

[PureSound15]

I work for a large bank. I've been a district manager for a credit union, Director of Sales for a credit union - and now am a regional manager in commercial banking.

[lordairgtar]

My first new car I bought when I had a score in the high 600s. After three years of paying on a five year loan, I traded my car in on another new car. Score was then in the mid to high 700s for the both of us. It works, but takes awhile.

[wrath]

Get a simple interest no prepay fee 2 year auto loan. A month later, make a large payment on principal. Most banks will then re-calculate your loan payment and it will be minuscule. It will show that you've paid off the loan at term. However, it is not given the weight of say a $500/month payment for five years.

Responsible use of credit cards/revolving credit will do far more for you than short-term installment credit (loans).

A lot of credit comes from history. Essentially, if you want a loan they want proof that you can pay it back. So the best way to get a loan is to prove that you've paid one off in the past.

[BR3W CITY]

let me pose a question on this since I'm curious about a similar issue.
My credit is pretty good, couldn't tell you the actual score but I've never missed a payment on anything or had a single hit against me credit.
I have payed off a student loan by its term, I have 2 credit cards (i only really use one, mainly for gas and travel for the rewards)...and I've NEVER payed less than the total amount due.
I'm looking at buying a newer car in the next few weeks; prob around 20k. Between trade in and money down, I'd only be looking at financing about 10k. I could pay for the whole thing cash but would rather stretch it out a bit (1-3 years) with a small car loan. BUT I can't currently give proof of employment; with a good credit score and enough cash, will they still get you a decent rate on financing? Or should I try to go through something like a credit union for a pre-authorized loan and then shopped dealers? I've never done this before

[Wagonbacker9]

no proof of income = no loan.

This is why drug dealers pay for their escalades in cash. lol

[Waver]

Well with proof of income, depending on where the income is coming from, it might not be enough. If you dont have any income that can be garnished (ie child support,ssi, disability), but put down a good amount down (like at least 50-75%of the value of the car) you could still get financed with out a job.

[05caddyext]

Not true. You can still get a loan if you don't have a job. The only thing the bank cares about is that you don't finance more than they can get back if you can't pay them back. If you are buying a 20k car and only need to finance 10k of it, the bank can easily recoup their money if you default. Just don't do your financing through the dealership, they will run your credit 10000 times and that hurts your score. You also said that you always pay off your credit card every month. This actually hurts your credit score. You would think that it would be good, but their is a ratio they look for on amount of credit being used vs how much is available. Your ratio is 0 which is bad. Against popular belief, there is still plenty of money being loaned out. If you can't get it at one bank, I garantee you can find a bank that will give you the money. You may not get the greatest interest rate, but someone will give you the money. Also a more important question would be why are you looking to buy a brand new car with no job? And why don't you have a job, the bank will want to know this for sure.

[WhatsADSM]

Not true. You can still get a loan if you don't have a job. The only thing the bank cares about is that you don't finance more than they can get back if you can't pay them back. If you are buying a 20k car and only need to finance 10k of it, the bank can easily recoup their money if you default. Just don't do your financing through the dealership, they will run your credit 10000 times and that hurts your score. You also said that you always pay off your credit card every month. This actually hurts your credit score. You would think that it would be good, but their is a ratio they look for on amount of credit being used vs how much is available. Your ratio is 0 which is bad. Against popular belief, there is still plenty of money being loaned out. If you can't get it at one bank, I garantee you can find a bank that will give you the money. You may not get the greatest interest rate, but someone will give you the money. Also a more important question would be why are you looking to buy a brand new car with no job? And why don't you have a job, the bank will want to know this for sure.


Your ratio is not zero.

I pay my cc off every month, and the amount that shows on a credit report is the balance due at the end of whatever month it was. (Which is still a decent chunk of change)

BTW I agree with Ryan. Seems like something like a CD secured loan seems like a good way to rebuild some credit. You will be out a little bit of money in the end but it is only the difference between the 2 rates.

[Crawlin]

Debt to income has something to do with your APPROVAL, but it has nothing to do with your score. Do you constantly update the reporting agencies everytime you get a raise? NO.

Also, yes repayment history is a good chunk but not all. One of the biggest swings is on your available balance on those credit cards.

5000 balance on a 5000 limit = no good
5000 balance on a 20,000 limit = better than first example

Why that is, who knows. Shows you still have "spending ability" but if two people with identical histories MINUS the above example, the top person would be 60-70 points lower.


As for the loan with no provable income, if your score is good enough, and you have enough of a downpayment, they aren't going to ask for proof of income. They will just go with whatever you wrote down on credit applications. Why do you think there is a bunch of kids running around with 5000-10,000 Best Buy limits, they put down that they make 80,000/year and stuff like that doesn't get checked.

As for dealerships running your credit hundreds of times, that's not always true. First if they do it over the course of WEEKS then yes it will hurt. However, putting 3-4 banks on the same day just shows you are shopping for a vehicle and will NOT affect it any different than if you do just one bank. I'm not saying definitely go through the dealership, but the dealership can get you better deals than some banks and credit unions. We all know Landmark CU, well dealerships can get you a better rate than what your "member rate" is because of the volume dealerships do with them.