Buying a car can be the first big purchase of many people’s adult lives. Or, maybe you’ve been building credit for a car loan for a while and want to upgrade to a better car. In either case, polishing up your credit score before making the purchase can lead to significant savings in interest. Here are our best tips to build credit for a car loan so you can save more for other things in your life.
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What credit score do you need to buy a car?
What credit score you need to buy a car depends on several factors. If you want an auto loan with the most favorable terms, a credit score above 700 or even 740+ should ensure lower interest rates and fees. You may be able to qualify for an auto loan with a much lower credit score, but you’ll likely end up paying significant fees and higher interest.
While you build credit for a car loan, keep in mind that your credit score can also vary somewhat depending on which credit bureau your lender checks. There are three main credit bureaus—Experian, TransUnion, and Equifax. Not all lenders report to all three credit bureaus, so your credit score may vary by as much as 40 points.
Generally speaking, a credit score of good to excellent will get you the most favorable terms, but even with a credit score of fair, you may qualify for an auto loan. Exact ranges can vary by the credit bureau. According to Equifax, credit score ranges are:
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
Even if you fall in the lower ranges, there’s a lot you can do to boost your credit score and build credit for a car loan.
How long does it take to build credit to buy a car?
Generally, with some strategic planning, you can build a credit score from scratch in three to six months. You should also be able to recover your credit score in this amount of time if you pay off all debts and continue to pay bills on time. However, late payments can stay on your credit report for up to seven years, so you probably won’t get an excellent credit score in that time. Once you decide to build credit for a car loan, apply the tips below to start seeing progress even in the first months.
How to build credit for a car
If you’re ready to build credit to buy a car, you’ll need to focus on the basics—pay off balances, pay bills on time, and build your credit mix. Here’s a detailed explanation of how to build credit to buy a car.
Pay bills on time
The first step to building credit for a car loan is to make all payments on time. Payment history makes up 35% of your credit score—the single largest factor. If you can, pay off all bills in full each month. If you can’t, then at least pay the minimum on all credit cards on time. The easiest way to ensure you don’t forget about a bill is to get auto payments for the minimum due each month.
You can go in manually and pay the bill in full, but with the minimum, there should always be enough in your bank account to cover it, and you avoid forgetting a payment when life gets busy (as it so often does). You can also request your credit card issuers to set the payment due date to a couple of days after payday. That way, each month you’ll know that after payday you need to pay off the bills.
Pay off your balance in full
The next step to building credit for a car loan is paying off your credit cards each month. Paying off your balance in full can go a long way to building excellent credit in the long run. When you’re building credit, it’s especially important to spend mindfully so that you’re able to pay it off in full by the end of the month. The best way to pay off debt is to avoid it in the first place. Creditors will take notice, and your credit score will reflect it.
Pay down existing debt
If you’ve been carrying a balance, now is the time to pay it off to build credit for a car loan. Focus on saving more each month to pay off all past debts. Learn more about strategies like the debt snowball or the debt avalanche to pay off debt.
One says you pay off the credit cards with the highest interest rates first. The other suggests paying off credit cards with the lowest total debt first so you have more cards that are debt-free. You can use these strategies or your plan, but if you want to build credit fast paying off existing debt is an important step.
Maintain a low credit utilization rate
The credit utilization ratio is the relationship between your total available credit to total debt. It makes up 30% of your credit score and can have a big impact. Generally, you’ll want to use less than 30% of your available credit. Ideally, use less than 10%.
Credit utilization takes in your total available credit. If you’ve got one credit card with a $5,000 credit line, your credit utilization ratio will be calculated by that. If you’ve got three credit cards each with a $5,000 credit line, all three will be factored into your credit utilization ratio.
Here’s an example:
You have $1,000 in debt. If you have one credit card with a $5,000 credit limit, your credit utilization ratio is 20%—that’s excellent!
Keep in mind that you don’t want to max out any card. If you have three credit cards, each with a $5,000 credit limit, you still don’t want to charge $5,000 on one card. You will have 100% credit utilization on that card, even though your overall credit utilization is 33%. Building credit to buy a car requires low credit utilization ratios over the long term.
Improve your credit mix
Credit mix accounts for 10% of your credit score and refers to the types of credit you have available to you. Credit is either installment loans or revolving credit. Installment loans include student loans, auto loans, and mortgages. It means you pay a fixed amount each month for a set number of months or years.
Revolving credit varies each month. Credit cards are the most common type of revolving credit. Other examples of revolving credit include retail store cards, gas station cards, or a home equity line of credit.
To maximize your credit score while you build credit for a car loan, you’ll want to have at least one type of revolving credit and one type of installment credit. But don’t take on debt just to improve your credit mix. By optimizing the tips above (and below) even one line of credit is enough to build an excellent credit score. Once you get a car loan, you can build credit with the car loan.
Don’t apply for new credit too often
New accounts can cause a temporary dip in your credit score. To avoid harming your credit score, don’t apply for too many new accounts at once or within a few months. How many are too many? Experts have differing opinions on this, but usually, more than two within a few months can start to cause a significant dip in your credit score.
If you want to build credit to buy a car, keep a new account to one or two within six months before applying for an auto loan.
Regularly review your credit report
Your credit reports give you inside access into exactly what the three credit bureaus are seeing – and what companies report about you. The reports include all of the factors above, from payment history and credit utilization ratio to total debt. By checking your credit reports regularly, you can catch mistakes and request a correction as you build credit for a car loan.
You are entitled to a free credit report from all three of the main credit bureaus—Equifax, Experian, and TransUnion. Now through December 2023, you can get a free weekly credit report from all three credit bureaus.
Credit reports are available online at AnnualCreditReport.com. You can also access your credit report by phone or by mail. You can get your credit report by calling 877-322-8228. For TTY service, call 711 and ask the relay operator for 800-821-7232.
To request the credit report by mail, you’ll need to download and complete the Annual Credit Report Request Form and mail it to:
Annual Credit Report Request Service
PO Box 105281
Atlanta, GA 30348-5281
How to build credit to buy a car requires just a few simple steps. Depending on your starting score and goals, you can build your credit score in as little as a few months. Here are a few final tips:
- Consider asking a friend or family member with an excellent credit score to add you as an authorized user to one of their credit cards. Even if they don’t give you the card to use, your credit score can get a boost.
- If you’ve been paying rent or utilities on time regularly, you can also get those payments reported to the credit bureaus.
These few steps can pay off significantly, not only building credit for a car loan, but leading to significant savings on your auto loan and future financial opportunities.
Should I build my credit before buying a car?
It’s a good idea to build credit before buying a car to get a lower interest rate and better terms. How much you need to build credit for a car loan depends on your starting score, and the auto lender’s terms and offers.
What credit score do I need to buy a $30,000 car?
The minimum credit score will depend on the lender. Usually, lenders look for a credit score of 661 or higher. Scores over 700 are almost always preferred.
What’s the minimum credit score for a car loan?
The minimum credit score for a car loan will depend on the lender. Whatever your starting score, you can also build it to the good range with our tips on how to build credit to buy a car to get more favorable terms on your auto loan.