Rebuild Your Credit with a Car Loan

August 27th, 2021 by

A man is sitting with his arms crossed in front of paperwork.

Bad credit is something that can happen to good people. It can happen to anyone for any number of reasons. But there is hope. Here is how to improve your credit with a bad credit car loan from a bad credit car dealership like Dan Cummins of Georgetown. While it may sound counterintuitive, getting a car loan with bad credit is one of the best things you can do to rebuild your credit rating. Think about it, you get a new or used car, and you get to improve your credit, making it easier to lease a new apartment, refinance your home, or extend the limits on your credit cards.

It may sound like magic, but it truly is not. This comes down to how finances work, showing the world that you are a good credit risk. When you stop by Dan Cummins of Georgetown, our finance team will be happy to go over your various lease and loan options on the next vehicle you buy from us. We are conveniently located and waiting to show you that bad credit can’t keep you from buying your next car.

How Did We Get Here?

For those who have bad credit, this is probably the first question you ask yourself. There are a number of reasons that can lead you to having a bad credit rating. One of the most common is unpaid medical expenses. Too many of us get sick from illnesses, and our insurance will not cover all of the treatment. If you aren’t able to make timely payments of co-pays and deductibles, you could find yourself with open bills that lead to a drop in your credit scores.

Similarly, if you fall behind on rent or mortgage payments, the landlord or bank will take steps to institute eviction or foreclosure proceedings. These, too, can damage your credit. Other things like open lawsuits, unpaid judgments to creditors, and large unpaid balances on credit cards can also leave us with bad credit. Filing for bankruptcy can wipe out most debt, but doing so will cost you up to 200 points on your credit score. It may also lead many credit card companies to close your accounts.

Why Did This Happen?

As you can see by what was illustrated above, there are a number of different things that can happen in your life that can leave you with bad credit. Let’s take a step back and explore the credit rating process.

There are three main personal credit rating agencies in the United States: Equifax, Experian, and TransUnion. This is different from corporate credit rating agencies like Standard & Poor’s and Moody’s. These agencies collect information on adults across the country that is then used by possible lenders, employers, and landlords to determine the creditworthiness of each person.

While each of the three agencies comes up with its own credit score, these tend to be within a few points of each other for each individual being rated. For example, Experian uses a scale from 250 to 900 points. Any Experian score below 580 is considered poor, while scores over 670 are good, ranging to exceptional for scores over 800. Your score is not static and will go up and down as you make payments, miss payments, and run up balances on your credit cards.

A man is hitting his forehead after looking at his credit score.

Is Bad Credit the End of the Story?

Even if you have a bad credit score, you can still get a loan. All it means is that you may not have as many lenders to choose from, and those that will lend you money may ask you to pay higher interest rates. For example, Experian reported that average interest rates for borrowers with scores between 501 and 600 points was 11.33% on a new car and 17.78% on a used one during the second quarter of 2020. In other words, having bad credit does not end your chances of getting a loan; it only means you may need to pay a little more back on it over time.

If you are concerned about your credit rating, there are ways to get a credit report on yourself for free. Each of the different agencies provides ways to get a free credit report, and many credit cards now offer a monthly free credit score as one of their benefits to cardholders. So, when you go into a dealership, you won’t be surprised when they pull a credit report on you. Knowing in advance will help prepare you so you will be in a better position to negotiate a good deal on your next vehicle.

How Does a Car Loan Help Your Credit Rating?

You would think that adding debt would hurt your credit, but this is actually not true. It is the not the amount of debt that you have that hurts your credit. Bad credit is created by failing to pay the current portion of your debt on time.

When you get a loan on your next car, you will have a set amount that you need to pay each month. Usually, you can do this by paying your loan holder online. Each time you make a timely monthly payment, you demonstrate to the three credit rating agencies that you are a good risk. As a result, they will often raise your credit rating when you consistently make on-time payments. You should always keep in mind that payment history counts for 35% of your credit score, so missing a payment can have a huge impact on your credit.

Furthermore, as your credit score goes up, you will notice that more and more banks and credit card companies are making offers. You will also find it easier to get loans with good interest rates. So, you want to make sure you stay on top of your payments.

One interesting side of credit scores is that you can actually get penalized for not having enough debt sources. This is referred to as having a thin portfolio. For example, if you only have one credit card, no car loan, and no other loans or leases, the credit rating agencies may actually take points off from your credit score for not having enough credit sources. This is another way that a car loan is beneficial, as it will add another lender to your portfolio, signaling to other lenders that there are many different sources looking to lend you financing, whether for a car or just a general credit card.

A person is holding their hand out of a car window giving a thumbs up after leaving a bad credit car dealership.

Some Tips for Getting Your Car Loan

Here are a few things to keep in mind when you are looking for a car loan from our dealership.

First, you check your credit and pay down as much debt as you can, focusing first on amounts that are past due. This will have the effect of giving your credit score a little boost. It can even allow you to get a better deal, such as a lower interest rate, which will put more money in your pocket in the long run.

Second, do a rough calculation of your monthly budget. Start with your take-home pay and then subtract your usual bills like rent or mortgage, gas, utilities, and food. The remainder should reflect how much you can afford to reasonably spend each month on your car loan payment.

Third, check to see if you have some savings in the bank that you can use as a down payment. This will reduce the amount you need to finance for your car purchase, which will reduce your monthly payments.

Finally, contact our finance department for a pre-approval on a car loan. Our friendly staff will be more than happy to work with you, so you have something lined up before you stop in for a visit.

Don’t Let Bad Credit Stand in the Way of Your Next Car

We understand that you may have had some problems in the past. This is why at Dan Cummins of Georgetown, we don’t let bad credit stand in the way of getting you a lease or loan on your next new or used vehicle. Our finance team is standing by, ready to help you get your next car loan with competitive terms that fit into your budget. In doing so, we will help you rebuild your credit so that you will only see your credit score going up while you pay off your car loan. This is what we call a win-win situation for you.