Considering a car loan? Take a look at the options based on your score and financial situation before applying. But if you’re wondering whether a new car loan will help boost your credit, read this first.
Dear Keeping Score,
I’m thinking about purchasing a newish (doesn’t have to be brand-new) car to help improve my credit score. My question is: Will getting an auto loan by myself raise my credit score faster than me consolidating my auto loan with my wife’s auto loan? She has good credit, mine isn’t terrible and I would like to get it above 630 (currently at 585) within the next… six months. Will doing it “solo” raise it faster than doing the auto loan(s) jointly? Thanks in advance!
Let’s begin at the beginning. Don’t buy a car to improve your credit score. Buy a car if you need another car! There are many better ways to improve your score than taking on a pile of debt.
While we’re at it, I hate to break it to you, but 585 might not seem “terrible” to you but in the world of FICO scoring it falls in the bottom of the “fair” range (that range is 580 to 669). A good sneeze and you’ll be in the credit scoring dungeon. The only category worse than fair is the “very poor” rating of 300 to 579. I’m confident you can do better and targeting 630 as a goal is a good start.
What to consider before applying for a car loan
If you go ahead with the car purchase, it really doesn’t matter from a scoring perspective if you borrow jointly or on your own. The reason is a legal term called ‘joint and several liability.’ What it means is that both of you are fully on the hook for the debt if the other fails to pay for any reason. The debt is yours just as certainly as if it were in your name only. So, it is scored as if the debt were solely yours even if joint.
Since both of you would be on the note for the loan, I suggest that you both be listed as co-owners on the title if your state allows. It may go without saying, but I’ll say it anyway, if you and your wife are both on the loan and you miss a payment, your wife will not be happy because you will have damaged her credit.
This is not to say that you won’t be able to get an auto loan yourself. Getting an auto loan is certainly easier if you have good credit, but there are always lenders (known as “subprime”) who will loan to those with less-than-stellar credit. These lenders have stricter guidelines and will require you to prove your identity as well as your income, residence and working telephone. They will also want a list of personal references and a down payment of about 10% of the car value.
Getting a car loan with good credit
You didn’t tell me what your wife’s credit score is, but I will tell you that good credit is going to get you a lower interest rate, smaller down payment and smaller monthly payments on any car loan. So, you might want to go the joint purchase route, but I’m not sure you will be able to consolidate a new auto loan with your wife’s existing one.
Auto loan consolidation works basically like credit card consolidation, but it is not as common. That being said, consolidation by its very nature assumes there are already two loans in existence that you want to consolidate. The reasons for consolidation are also much like why people do this with credit cards – to get a better interest rate. But if your wife is agreeable, you can try for a new loan by applying jointly. Or she could apply herself and add you to the account; that way only her credit score would be used. To see the difference in car loan rates, check out our sister site Bankrate’s auto loan rates and enter both scores to see the differences in terms. The rate you might expect at your score level is around 12% to 17% while someone with top credit would be in the 4% range.
You can also use Bankrate’s auto loan calculator to see how much you would pay every month.
How car loans affect credit scores
However, from the tone of your question it seems that you are not all that concerned with how much this loan is going to cost you, only how it will benefit your credit score. I’m not sure that is the way to go, but what I can tell you is that when you apply for a car loan your credit score will be dinged by a hard inquiry.
The good news is that multiple car loan inquiries in a short period of time can count as a single inquiry to allow you to do rate shopping. The period of time used to group all your inquiries into one depends on the version of FICO score your lender is using. Older score versions allow 14 days; most versions in use today allow 30 days and the newest FICO versions allow 45 days. This is a good thing, since multiple inquiries might otherwise signal trouble to lenders, and that can seriously bring down your score. Also, be aware that hard inquiries will stay on your credit report for two years, but are only scored for 12 months.
See related: Buying a card with no credit: 6 options to consider
How to improve your credit score
If you are able to secure a loan in your name, the way to improve your credit score is to make every payment on time to your lender, as agreed, every single time. You must also do the same with all of your financial obligations – credit cards, etc. in your name. That’s because payment history is the number one factor in your FICO score, counting for 35% of the total.
Making on-time payments will quickly replace the points you lost from the hard inquiry in a few months and after that will continue to help your score rise. This will take some time, and I can’t promise you that in six months you will be where you want to be score-wise. We are talking about a 45-point jump, and while it is possible, I don’t know that I would count on it.
One thing that might work in your favor, though, is if your file is light in the credit mix area (for instance, if all you have are credit cards in your name). Credit mix only accounts for 10% of your overall score, but can make a significant difference for those with thin files. Lenders want to see that consumers are able to consistently handle both variable (like credit card) and fixed installment (like car loan) payments.
See related: How to build good credit
You definitely need your name on the loan if you want to raise your score; going solo or joint will not make a scoring impact difference. But the joint route is very likely to make a difference in your car payment if you can get better rates with your wife’s help.
That extra cash from a smaller fixed payment could very well translate into how successful you can be at meeting all of your financial obligations, which will be crucial to getting into the higher scoring category you want.
Remember to keep track of your score!