Does Financing a Car Help Build Credit Score In Canada?

Posted by on Jan 29, 2024 - Archived under Uncategorized

Most people know that you need a credit score to get a car loan in Burlington but does financing a car help build credit? Once you qualify for the loan, do it begin repaying you by helping your credit score?


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How Does Financing a Car Help Build Credit?

Your credit score will influence how many lenders will work with you and the interest you pay on that loan. Once you have the loan, a few successful payments will gradually increase your score.


Builds Credit History: A significant portion of a credit score is made up of payment history. The more debt you pay on time, every time, the higher your score will go. This is exactly how financing a car helps build credit.


Getting approved for a car loan with low or no credit history can be difficult, but not impossible. If you qualify for a low-credit car loan and make your payments on time every month, you’re improving your credit.


You might have heard that these types of car loans come with high-interest rates, and that’s not entirely incorrect.  As someone with little or no credit history, you’re seen as a high-risk borrower.  Because of this, lenders need to secure their investment in you by charging slightly higher interest than a bank would.


That being said, once you pay this one off and prove you’re a responsible borrower, you can trade in or sell your vehicle and apply for a new loan. You’ll likely qualify for a lower interest rate and continue to make improvements to your score.


how credit score is calculated


According to Experian, your payment history can make up 35% of your credit score. If you’re looking to increase your score or want to know how an auto loan affects it, that’s how much paying on time can influence the score.


Consider the next highest part of the credit score is the amount owed, which comes in at 30%, and you see just how important it is to stay on top of payments.


With that in mind, you have two very simple tools to ensure you never miss a payment.


Automatic payments: Setting up automatic payments when agreeing on the auto loan is the best move you can make. As long as you always have sufficient funds or an overdraft so the payment is made, this is the easiest way to always pay on time.


Payment reminders: Setting an alarm on your phone, a calendar alert on your work computer or other reminder somewhere you spend a lot of time can work too. It isn’t as effective as automatic payments but it’s the next best thing!


Early Car Loan Repayments and Credit Scores

If paying your auto loan on time helps your credit score, what effect does early repayment have? This is where things get a little complicated.


Repaying a loan in full proves you’re a low-risk borrower, which gives lenders confidence when you want another loan.


Repaying the loan also lowers your debt utilization ratio, the amount of available debt you are using.



However, you might find that repaying the loan early may reduce your credit score slightly. For a time at least.


This is because the credit mix also makes up part of the score. This is the variety of debt you have, loans, credit cards, student debt, and so on. Having a narrow mix can reduce your credit score slightly. We don’t know why, it just does.


Repaying your auto loan early should be done to benefit your financial situation and not to improve your credit score. Having more money left at the end of each month is a benefit. Not have extra debt hanging over you can also be a benefit.


Either way, it’s your loan, do whatever you think is best with it!


For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today!

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