Question:
Hello,
My wife and I are looking to purchase a car and are curious about how taking out an auto loan might affect our credit scores.
We are both fortunate enough to have decent jobs and have been relatively aggressive savers, so it is possible for us to pay for a car in cash. In addition, we have been lucky enough to have been able to get by without incurring any debt (other than credit cards that are consistently paid off each month, no student loans).
As a result, our credit scores are based solely on credit cards and we have not had any debt involving monthly payments. At some point in the next couple years, we would like to buy a house and want to know if it would be a good idea to add an auto loan to our credit history. If so, how does the amount and duration of the loan factor into our credit rating? Are there benchmarks used by the credit rating companies? For example, would financing $10,000 dollars of the purchase be better than $5,000? Would a 24-month loan have a different effect than a 36-month loan?
Enjoy the show – any advice you might be able to offer would be greatly appreciated.
Best,
Jon
Response:
Carmen Wong Ulrich Sep 7, 2013 Former Host
Sure, another type of loan can help your credit if it’s managed well. And yes, the inquiries into your credit to apply for the auto loan will ping your credit a bit but only for a short time. Sounds like you kids are in great shape. If you want to build your credit a bit, sure, finance a piece of the loan — a small piece — especially if you’re not offered anything less than 4% interest. Though you’re borrowing to buy an asset, something with value, if you have the cash on hand paying 8% interest just to build credit doesn’t make sense. Before I give you a full-cash-purchase blessing, I’d need to know how much you have in emergency savings. If the cash you’d use for the purchase is emergency savings, then definitely finance a portion rather than empty your savings account.
As for type of loan should you finance, go for the shortest loan you can afford, like a 24-month. Why stretch it out and make it cost you more? As for amount, that’s negligble and depends much on your other forms of credit, balances, etc. You’re on the right track. Keep costs low, protect some savings and enjoy your ride!
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