5 steps to build credit to qualify for a car loan

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
My granddaughter just got a secured credit card with $200 limit. She wants to finance a new car for $19,000 in a year or earlier. What does she have to do to obtain this? – Harry


Dear Harry,
You are kind to ask on your granddaughter’s behalf. The short answer is yes, she can get a car loan of that size, but only after she builds a reputation of being a responsible borrower. That takes time and effort. She also must prove to a lender that she can afford the monthly payments, which means she needs an income that is enough to cover all her expenses as well as a hefty car payment.

Here is the strategy for your granddaughter. As a (presumably) young adult, she needs to take control over her own financial life, starting today.

1. Charge in small, steady increments

It’s great that your granddaughter has a secured credit card (here is our list of the best secured credit cards), because I would have recommended it! Now what she needs to do is use the card in a very specific way.

Credit reports need to list a steady stream of positive activity, so on a monthly basis, she needs to keep her credit utilization ratio as low as possible. For a credit line of $200, and I’d recommend spending a maximum of $60. That will prevent her score from getting dinged for using too much of her credit line.

A credit score can be calculated at any point of a billing cycle. If you owe too much, even if you plan on paying it off completely, points will be shaved off your scores. (FICO and VantageScore are the two most common scoring companies, and the scores range from 300 to 850.)

2. Pay on time

No matter what, get payments in by or before the due date.

The credit card issuer will then send that information to the credit reporting agencies, and it will be factored into her scores favorably. Consecutive on-time payments will result in a higher credit score, so as each month passes without a break in that payment history, her scores are sure to increase.

3. Delete the debt every month

With a credit card, you do have the option to pay partially, but don’t. Instead, your granddaughter should send the credit card issuer every penny of the balance.

Remember, she’s proving to a future car lender (as well as any other creditor, such as a landlord or business) that she’s financially smart and stable. By never carrying over a balance, she’s showing exactly that.

4. Keep a sharp eye on all credit activity and progress

Your granddaughter should check her online credit card statement at least weekly. Her credit card statement will indicate where she charged and how much she currently owes, and checking her statement gives her the opportunity to scale back charging if she’s close to the 30 percent credit utilization mark.

After using the secured card for about six months, your granddaughter can pull her credit reports from AnnualCreditReport.com. There are three credit reporting agencies (TransUnion, Equifax and Experian) and she can get all three reports from those bureaus for free once per year. 

She should read her credit reports to make sure they’re correct, and if she sees anything wrong, she should dispute it. She does not want to be turned down for her dream car over a mistake on her credit report!

While she’s checking her credit reports, she should check her credit scores from FICO at Discover Scorecard and VantageScore (she can get her free VantageScore at CreditCards.com).

5. Get a second credit card

After a year of following this credit-building plan, her scores should be on an upward trajectory. To really hike the numbers, though, your granddaughter should consider applying for an unsecured credit card and using it in the same fashion.

Your granddaughter should seek a credit card that fits her credit rating, so she won’t get denied. Applying for a credit card or loan will result in a hard inquiry on her credit reports, which will lower her credit score a bit temporarily, so she should only seek credit when she needs it. When your granddaughter has two credit accounts, she should use both as she has been using the one.

Eventually, your granddaughter’s credit scores should be in the mid-700s, and at that point, most lenders will consider her to be an appealing customer. As long as her income is sufficient and secure, she is free to go vehicle shopping!

Just be aware that it’s also easy to bite off more car loan than you can handle financially. To reduce the amount borrowed as well as the monthly payments, put down a large down payment. If she hasn’t yet started saving for that, she should do it now.

As your granddaughter’s credit stands now, she most likely won’t qualify for the best car loan rates, if she can qualify for a loan at all. I would encourage her to follow the steps outlined above that will help her get the car she wants, but know that it will take some time and patience to build a decent credit profile for her to qualify for a substantial car loan.

See related: Buying a car with no credit: 6 things to know, FICO’s 5 factors: The components of a credit score

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Updated: 02-19-2019