Do Car Loans Help Build Credit Score in Canada?

Do Car Loans Help Build Credit Score in Canada?

Posted on August 12, 2022

Auto loans and any type of borrowing depends on a healthy credit score to attract the best rates. But does servicing an existing loan help build that credit score? That’s the question of the day. A question we posed to our Milton car loans team. They explain how car payments help build credit score.

Auto loans and rebuilding credit

Your credit score is a numerical reflection of your credit report, which in turn, is a reflection of how you handle credit and debt. The better you handle debt, the better your credit score.

With that in mind, you now know that car payments help build credit score.

But how?

Payment history

Paying your auto loan each month and never missing one will help create a positive payment history. Your payment history, how reliable you are at paying debt, makes up to 35% of your credit score so can have a significant impact.

The effect is cumulative. Pay every month on time and your credit score will increase steadily over time.

We would say your payment history is the most important part of your credit report, and therefore, your credit score.

Make sure to set up automatic payments for everything you have going out. Make sure sufficient funds are always in place to make those payments and you should be fine.

Give it 6-18 months and, depending on your credit score right now, you could see significant improvements over that time.

Credit mix

Your credit mix also contributes to your credit score. This is a measure of different types of lending, auto loan, mortgage, credit cards and so on.

For some reason, credit bureaus like it when you have a spread of credit available. Have a healthy mix of options and your credit score will increase slightly as a result.

The trick is to have a healthy mix of credit options but not borrow too much, otherwise it will tip your income to debt ratio in the wrong direction.

Income to debt ratio

Your income to debt ratio, or debt to income ratio depending on who you ask, is a measure of how much debt you have compared to your income.

While there isn’t an absolute maximum, an ‘ideal’ of less than 35%, not including housing costs, is often used by lenders.

Borrow too much from too many sources and go over this amount and your credit score may be impacted. Your ability to borrow will certainly be impacted.

So, it’s a balance between using a wide mix of credit options and not using those options too much. An auto loan will use up a big chunk of your income to debt ratio so always be aware of what you’re spending and where.

When you’re ready for a car lease or loan, get in touch with the Port Dover auto loan experts at Northway Ford for great deals on auto finance.

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