10 Ways to Improve Your Credit Score With A Car Loan

December 17, 2019

10 Ways to Improve Your Credit Score With A Car Loan

Improve Your Credit With A Car Loan

The strategic method to improve your credit with a car loan is not only possible but can be a smart financial move. Many Canadians find themselves with less-than-ideal credit scores due to various factors, from rising living costs to wage stagnation. While managing debt responsibly is crucial, unforeseen circumstances can lead to late payments, negatively impacting your credit score. This makes obtaining mortgages, vehicle loans, and credit cards more challenging

Unfortunately, late payments and other indiscretions have an adverse effect on a person’s credit score making it more difficult to obtain mortgages, vehicle loans, and credit cards. For those who find themselves with a low credit score, there are ways to skyrocket your credit score quickly.

What Qualifies as a Bad Credit Score in Canada?

Credit scores in Canada range from 300 to 900 points. The higher the credit score, the more favourable lenders will be to the loan applicant. The make-or-break point is around 650 for most lenders. Those above 650 will likely qualify for most lines of credit while those below will not qualify and will have to look for alternative loan options. There are loan options available even for those with low credit scores.

How is My Credit Score Calculated?

While credit rating agencies differ slightly in the algorithms used, the main factors are:

Past Loan Repayments – 35%

This factor includes all forms of borrowing such as car loans, credit cards, utility bills and mortgages. They factor in late payments, non-payments, liens, debts that go to collections, delinquencies, and so forth.

Total Debt – 30%

This factor analyzes how the borrower utilizes credit. It calculates the borrower’s debt-to-credit ratio based on loans, lines-of-credit, and credit cards. If the borrower’s credit is maxed to the limit, it reflects badly on the credit score. Having credit available and not using it all reflects positively on credit scores.

Length of Credit History – 15%

A long history of responsible credit use and repayment reflects positively on credit scoring. Conversely, a long history of irresponsible credit use results negatively. Those with little to no credit history begin with a lower score until a credit history accumulates and can be assessed.

Hard Inquiries – 10%

Every time a potential borrower applies for credit, a ‘hard inquiry’ is made against their account by the lender. Excessive requests for credit reflect negatively on credit scoring. There are exceptions, however, such as shopping for a car loan within a short period of time typically within 45 days. Multiple inquiries of this sort are counted as one hard inquiry.

Types of Credit – 10%

Having an assortment of credit in good standing reflects positively on credit scores.

10 Ways to Boost Credit Scores

Having a credit score below the 650 cut-off can be frustrating. The borrower may need a car loan to purchase reliable transportation for work and family, but the bank won’t lend due to a poor credit score. But don’t despair, there are ways to repair credit scores so lenders will see you as a low-risk borrower.

  1. Request Your Own Annual Credit Report

Borrowers can request a free credit report annually from Canada’s two primary credit bureaus, Equifax and TransUnion. Checking it annually is a good habit to correct errors on the report. Common errors are unauthorized hard inquiries, debts showing as outstanding that have been paid, and even identity theft. Pay overlooked debt outstanding and keep records of the payment. Make sure the credit bureaus record the payments.

  1. Pay Current Bills on Time, Every Time

There’s not much that can be done to fix a poor bill payment history, but you can resolve to make all current payments on time, every time. Payment histories stay on your record for around six years, so they’ll eventually fall out of range to be replaced by a record of on-time payments. Set up automated payments to make it easier but remember having insufficient funds will hurt your credit score.

  1. Keep Credit Card Balances Low

Maxing out credit cards reflects poorly in credit scoring. A general rule is to carry a balance of no more than 25% to 30% of the card’s limit. If the balance is higher than that, make an effort to pay it down. Stop using the card and make payments every payday.

  1. Apply for a Credit Limit Increase

Consider applying for a credit card limit increase in conjunction with your increased payments. This will provide a lower credit utilization percentage and increase your credit score faster.

  1. Apply for a Secured Credit Card

If you’re unable to qualify for a traditional credit card, apply for a secured one. The borrower must place a deposit with the card issuer as security. Use and pay off the balance monthly to boost your credit score.

  1. Consolidate Debt

It can be difficult to pay down credit card and other high interest debt. It seems you’re only paying the interest each month and not reducing the principle. Consider consolidating the debt with a zero-interest credit card. It’ll result in a hard inquiry, but it’ll make it easier to reduce the principle and decrease credit utilization.

  1. Don’t Close Old Credit Accounts

If you consolidate debts to pay off credit cards or lines-of-credit, don’t close the paid accounts. Credit longevity increases credit scores, so leave the accounts open but don’t use them.

  1. Use Credit More and Responsibly

Using credit and paying it back often can increase credit scoring. For example, using a credit card instead of cash to buy groceries and paying the bill in full as soon as it shows on the account. The credit card company will report the balance owing at the end of the month, so be sure to pay it beforehand, within a couple of days, to keep your credit utilization low.

  1. Use a Variety of Credit

Don’t go overboard but use a variety of credit that fits your lifestyle. Having a credit card, department store card, an overdraft allowance, and a car loan show that you’re a responsible user of credit. Responsible is key. For example, buying children’s clothing on a Wednesday using a bank overdraft knowing that your paycheque will be deposited into the account on Friday.

  1. Use a Pre-Approved Loan Process to Keep Hard Inquiries to a Minimum

A pre-approved loan process will keep hard inquiries to a minimum. For example, a pre-approved car loan application will result in a ‘soft’ inquiry and not adversely affect credit scores. It only becomes a hard inquiry if the borrower chooses to move forward in the loan process.

Looking to upgrade your vehicle? The YourCarLoan 60-second Pre-Approval process is the first step to getting a new set of wheels. We believe everyone deserves a second chance toward an improved credit score. Successfully paying back a car loan will boost your credit score significantly. It’s free, there’s no-obligation and no hard inquiries to your credit report.

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