Don’t worry… I’m not going to do it. Not now, anyway. But I am thinking about it.
Ever since I found out that my credit score wasn’t as perfect as I thought, I’ve been pondering changes I could make to improve it. I know my score is still really good, but it’s not excellent. My payment history is spotless, my ratio of available credit to credit in use is very high, and I’ve had credit established since about 1997. I have a mortgage, credit cards, and a couple store credit cards. The one thing I’ve never had is a car payment.
My husband’s credit score does fall into the “excellent” category. For the most part, we have the same credit history for about the last 6 – 7 years, as we started combining our finances in 2002. But he had a car loan when I met him, and it still shows up on his credit report. He hasn’t had a car loan since the summer of 2002, so I assume that will be coming off of his credit report sometime this year. But for now, we think that is what is giving his credit score a boost compared with mine.
I’ve always been proud of the fact that I’ve never had a car loan. We bought my 1991 Civic with cash ($2300) in 2003, and it’s still cruising along. Before that, I had a 1989 Hyundai Excel, which my sister still drives. I just can’t get my head around the idea of paying interest on a depreciating asset like a car.
But I’m wondering if having a car loan might be worth it in terms of boosting my credit (our credit, since we would get the loan together, and I think that my husband’s old car loan won’t be on his credit report much longer). We’re currently putting money aside so that one day when we need to replace one of our cars, we’ll be able to afford it. Both of our cars are closing in on 20 years old, and we know they won’t run forever. Our plan had been to just pay cash for another car one day.
But now I’m thinking about perhaps getting a loan instead. We would pay it off quickly – perhaps making a total of 10 or 12 payments. This would minimize the amount of interest we had to pay, while still building an auto loan segment of our credit history. If I look at the interest as a fee paid to increase my credit score, it doesn’t bother me as much as the idea of paying interest on a car normally would. If we went this route, we would still only finance as much car as we could afford to buy with cash. But instead of paying cash, we would make payments for a while.
Right now, both of our cars are running just fine, and we have no intention of replacing either of them until they aren’t running at all. We put very few miles on our cars, and don’t anticipate having to buy another one for at least a few more years. So there’s plenty of time to mull this over (and build up our car replacement savings account). And who knows – maybe there will be zero percent interest offers again by the time we need another car. One of my girlfriends bought a car in 2002, paid it off in 2007, and never paid a dime of interest. A deal like that would definitely make me reconsider my “never finance a car” stance. (Although I think that those offers were limited to new cars, and we would only be interested in used vehicles).
Any thoughts on this? We don’t often need our credit score, since we rarely apply for credit. But since we’re preparing to sell our house and buy another one, it’s been on my mind a bit lately. Anyone have any experience with changes in their credit score following a financed car purchase?
I thought that if your score was above a certain number (I think it was 700?), you got the best interest rates on everything. Didn’t matter if your score was 701 or 799, you got the same rate. is this still true? I also heard something about them adding another credit bureau…so maybe i’m out of date.
Would your score improve in time to buy a house? If not, ‘good’ is good enough!
ah! i just checked my fico, looks like you need to be above 760!
I don’t see the benefit if your score is already excellent. For one thing, you don’t know what effect the car loan will really have on your score.
Another thing is that different lenders use different formulas to determine your FICO, so the number you buy as a consumer will not be the number a lender uses, and sometimes they use custom formulas (http://www.consumerreports.org/cro/money/credit-loan/credit-scores/overview/credit-scores-ov.htm). Of course their formulas are bot disclosed to the consumer.
Finally, even if you get a car loan and your score goes up a few points, it may not be enough to save on interest rates anyway. You really have no way of knowing.
Just seems like there are too many variables and unknowns to warrant paying more than you need to for a car.
My score was like yours–top level on every report but one. That one said I didn’t have a long enough credit history. Not much I can do about that, though.
I wonder if you could just finance it and then turn around and pay it right off? That way, you’d still have the loan on your credit report, but you wouldn’t have to pay any interest – or would you? Maybe you would since that is the first thing you pay off on a loan….but that stinks that they ding you because you are frugal and always buy your cars with cash!
Maybe if you just put a huge down payment down and then got a really small car loan with the rest??
I financed a car right out of college (which I paid off very quickly, thank you :) ) and I actually do have credit scores in the excellent category. I had never thought that it had something to do with my car loan?? Maybe that is why though. I’ve never bought a home either.
These credit scores confuse me! :D
I think your credit score gets dinged a little when you open a new line of credit, but then goes back up if you start making timely payments. Age might be a factor for you. I have a much more active credit report than my husband, but because he is 4 years older, his score is higher. His credit report has 4 more years of history than mine. I think they just made some drastic changes to the FICO scoring system as well.
Sense – No this wouldn’t happen in time for the house we’re planning to buy this year (assuming we’re able to sell our current house this year). We don’t need another car for a few years, so the car financing thing is a long way off. Hopefully the house deal would be long done by then.
April – If my credit score were already excellent, I wouldn’t be considering it. My husband’s is considered excellent, but mine is just good, not excellent. And we would still only buy a car that we could pay for with cash we had saved – we would just finance it instead of shelling out the cash upfront. My concern is that once the car loan falls off of my husband’s credit, his might drop as well.
Carrie – we thought about that. We’re not sure how long you have to be making payments for in order for it to have an effect on the credit rating. We would be willing to spread our payments out over 6 – 12 months, but not much longer than that. And again, we’d only do it if we had cash in the bank to cover the whole thing from the start.
Kaytee, – my husband is 32, and I’m 30. I think he got his first credit card a year or two before I got mine, and that could be a factor for him. When we looked at our reports side-by-side, the biggest difference we notice is the car loan. And books I’ve read about FICO scores indicate that car loans are definitely a factor in credit scores.
It’s frustrating that credit scoring is such a secret operation. I’ve read a lot about them, but it’s still just speculation (educated speculation, but speculation none the less) on the part of the author. We’ve got lots of time to think about this, and we won’t be using a car loan as a means to buy more car than we can afford. We’re just trying to figure out if it would be beneficial to us in the long run. We figure that having a great credit score in our corner is a benefit, even if we don’t have concrete plans to use it or get a loan anytime soon. But we’re not sure how much of an impact a car loan would have anyway. We’ll be watching my husband’s score later this year to see how it’s impacted when the car loan falls off of his credit. That will give us more of an idea about how all of this would work.
Have you considered saving up for (and perhaps financing a part of) a new car like a Honda Civic? Certain cars don’t depreciate like most others do.
I recently received over $5000 for my 9+ year old Honda Civic which was almost half of what I paid for it brand new. If you drive that car until it’s 20 years old you have the benefit of a warranty and also take advantage of the best years of it’s life (especially if it’s paid for upfront or in a year or two).
While researching cars prior to my purchase I found there were some cars where it didn’t make sense to buy new since they don’t seem to lose their value as soon as they drive off the lot.
Just a thought.
I took advantage of a 30-day free trial of CreditSecure, offered online through my American Express account. It gave access to all three credit reporting services’ reports and also to a “what-if” tool that allowed you to try out the effect of different things on your credit score.
You might try that, or see if one of the credit reporting services or MyFico allows you to do something similar.
I really don’t think it’s your lack of a car loan. I haven’t had a car loan since 1985, and my score has been excellent for as long as I remember. My guess it it is just the length of your credit history compared to your husband’s, or perhaps the ratio of debt to available credit.
Credit history is not only the length of time they have data for you, but also the age of your accounts and their credit limits. I learned that the hard way when I canceled a credit card I’d had for about 20 years because I wasn’t using it anymore. Although I’d never requested a credit limit increase, the issuer gradually had increased the limit to over $35,000. When I closed the account, my credit score took a significant hit.
On the one hand, when the time comes to buy a car, there may be zero interest options available in which case, why not? But on the other hand, paying interest on any debt just to increase your credit score seems like a move in the wrong direction to me.
Just something to ponder:
A friend of ours was looking into one of those 0% financing deals on cars. What he found out was that 0% is not really 0%. There was a “Cash” price, and then a 0% financing price. They effectively increased the price of the car in order to cover the financing. When my friend questioned them about it, they basically said “why would we give someone financing for the same price as someone who walks in with cash”? An uneducated consumer might just walk in and take the 0% deal without asking if there was a cash price, thinking they were getting a great deal.
I also second the notion of buying a new Honda! I know you drive a Honda now so you know how great they are – Between my Husband and I we’re on our fourth Honda (an Odyssey, because we couldn’t fit 3 car seats in our Civic!). We did buy the Odyssey used because it was half the price of a new one, but I wouldn’t hesitate to buy a new Honda in the future. They hold onto their resale value remarkably well, and we have NEVER had a major repair on any of our Hondas. I *heart* Honda. lol.
I have had a credit card for about 4months and my limit is like 300, I have been told that after a year it will go up to like 1000 if i dont default on any payments. Will I be able to finance a car then? as long as I have a strong year of credit history but the limit is only 1000?
What you need to remember is that the question isn’t “will you be able to finance a car” but “AT WHAT COST will you be able to finance a car.” Even people with horrible credit usually can find someone to finance them, but they will pay through the nose in higher prices, higher interest rates, requirements of credit insurance, added fees, etc. I’ve seen finance agreements that effectively nearly triple the cost of the car, although you can’t tell that until you do the math, which those buyers didn’t know how to do.
If one year of history on a low credit limit card is all the credit history you have, you would do well to save up enough for a hefty down payment, which should help you negotiate better terms.
On the other hand, car dealers seem pretty desperate to sell inventory right now, so who knows what they’ll do?
I think you would be better off without the loan. Kaytee is correct in the fact that when you apply for credit, your score is lessened, but it builds again and more than likely higher with timely payments. A car loan is a factor on your credit report, much more so I believe than medical bills. I personally would keep to paying cash for everything except a home, as you are able to save up and have that opportunity to pay cash.
Hey, FB…have you decided to quit your Sunday roundups? I always looked forward to those.
The Frugal Blog Network decided to go to once a month round ups instead of doing them every week. But I could go back to doing a round up from all of my favorite blogs on Sundays. Thanks for the reminder!