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Do Car Loans Help Build Credit Score in Canada?

Do Car Loans Help Build Credit Score in Canada?

We all know that you need some kind of credit score to get an auto loan. We also know that you can get bad credit car loans for low credit scores and standard auto loans for higher scores. But do car loan payments help credit score?


Yes, it does!


The two are linked with benefits going both ways. It isn’t just a one-way street.


Your credit score is a reflection of how you handle credit, so having credit can help fill out your credit report and impacts your credit score in a number of ways.

Car Loan Payments Help Credit Score


The type and amount of auto loan you qualify for is dependent on your credit score. If you have a high score you can qualify for cheaper loans. If you have a low score you may need a specialist auto loan.


Once you’re paying the loan, it can help you improve your credit score.


How? By the positive payment history.


Payment history, as the name suggests, is a record of your history making payments on your debts. It can make up between 30-35% of your credit score so anything you can do to fill this out can really help.


Your credit score is also made up of credit mix. This counts the variety of debt products you have, credit cards, mortgage, auto loan and so on. The wider the variety, the more positive benefit credit mix has on your credit score.


This has to be balanced with the amount of credit you have though. While credit mix positively impacts your credit score, the debt to income ratio goes the other way.


Debt to income is a measure of how much borrowing you’re eligible for that you’re using. Borrow too much, your ratio goes up and your credit score can go down.


Does Settling an Auto Loan Early Help Your Credit Score?


You would think paying off a debt early would be entirely a good thing wouldn’t you? Unfortunately, that’s not so cut and dried.


Settling your auto loan early may have a positive effect on your credit score by lowering your debt to income ratio. But, it can also reduce it by reducing your credit mix and removing those positive payment history entries.


We don’t recommend worrying too much about your credit score if you want to settle your auto loan early. Nobody wants debts hanging over them unnecessarily so if paying it off early works for you, do it regardless of any negative impact it may have on your credit score!


Not many of our clients get auto loans purely to boost their credit score. It’s an unintended consequence of needing a car to get to work or get around.


The same for paying it off. We would never suggest someone keeps their auto loan purely to boost their credit score. Life is much too short for that!


If you're ready for a car loan in Southern Ontario, we'd love to help with that! simply fill in the form below to get started.

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