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Will Getting a Car Loan Improve My Credit Score?

04/02/2019 @ 2:51 AM

Plenty of Canadians have wondered whether buying a new car is a good move when they have damaged credit. After all, the last thing you want to do is take your already poor credit score and make it even worse.

Having a car is a necessity in most areas. We explore how getting this essential form of transportation using credit can actually improve your credit score, fixing some of the damage from the past. We also take a look at what about a car loan in Scarborough could hurt your credit standing.

Armed with this knowledge, you should be able to more proactively manage your credit situation and take out a car loan with greater confidence.

Getting Out of the Trap

Having a low credit score can be frustrating, but that doesn’t mean you’re financially trapped. While you might feel like plenty of options for improving your score are cut off, the fact is getting a car loan in Scarborough actually isn’t difficult.

When you visit a car dealership or broker, they have the ability to shop around for something that works. They deal with a wide range of lenders and financing programs which might be designed for someone in your exact position.

While getting a car loan might be possible, you’re right to wonder if it will help or hurt your credit score. If used correctly, buying a car can improve your credit, helping you to get on the right track financially.

Secured Credit

One thing you should definitely understand before getting a car loan in the Scarborough area is that such a loan is considered secured. That means there’s property which the creditor uses as collateral. If you don’t pay on the loan, the lender has the right to take that collateral.

As you probably already know, this means not paying on your car loan could mean the lender takes the car itself. They hire a repo company to tow the car away when you’re not in it, which can be a frightening and embarrassing situation.

Car loans, unlike credit cards, are secured.

That’s obviously not what you want to have happen, but having the option of taking the car helps the lender feel more assured about extending credit to you. That in turn means you’re more likely to get a car loan despite your poor credit score, versus an unsecured line of credit, like a credit card.

Building Positive Credit

If you have little or no credit, or you have blemishes in your credit history, one of the best things you can do moving forward is to build positive credit history. Getting a car loan in Scarborough is a great way to establish or re-establish positive credit. Just remember that you need to make the payments on time, otherwise you’ll likely see your credit score go down, not up.

As you pay on a car loan, it will build a positive payment history for your credit file. Most lenders report each payment you make on a car loan in Scarborough, whether it’s on-time or late. Over time, being on time will improve your credit score. This is not an overnight fix but instead is something that will take some time. The longer you’re paying on your car on time, the more your credit score will improve. In the meantime, you get to drive a nice car that won’t need as many repairs as something older, which is a huge financial advantage.

Credit Scores Explained

To really understand how a car loan in Scarborough can improve your credit score, you first need to know how anyone’s score is calculated.

A credit score is not some magical number that just appears without any method behind it. Instead, there are several factors in your credit file which contribute to calculating your credit score. As you understand what these factors are and how they affect calculating that final number, the ability to effectively manage your future becomes a possibility. The saying is true: knowledge is power.

If you’re using credit, you should undestand how your score is calculated.

First off, you need to understand that credit scores in Canada can range from 330 to 900 points. The higher the number the better. In general, a score over 600 is considered fair credit, meaning you have a pretty good chance of getting a loan when you apply.

Not only will a higher credit score boost your chances of getting any credit applications approved, it can lead to a lower interest rate on a loan. A higher interest rate actually increases how much you pay to borrow money. For lenders, if they feel you’re more likely to miss payments or stop paying on a loan altogether, they help protect themselves against that risk by charging more interest.

By improving your credit score over time, you’re actually saving yourself money on loans. It’s a smart move, especially since you’ll need car loans in Scarborough in the future and not just now.

Payment History

Lending money to anyone is a risk for a bank or creditor. After all, not everyone has the discipline or maybe even the intention of repaying a loan. One of the best indicators potential lenders have found to determine if you’ll make your loan payments on time and as agreed is to look at past behavior.

For this reason, the payment history in your credit file plays a huge role in calculating your credit score. As you can probably guess, this information includes each time you’ve paid late on a loan or completely missed a payment, because creditors report this information to the credit bureaus.

That doesn’t mean just because you’ve messed up in the past there’s no way to get back on track. The more recent payments in your credit file are the most important, so if you had some financial difficulties in the past but make all your loan payments faithfully now, you could still have a good credit score as a result. Since items on your credit history don’t stay on forever, past mistakes or difficulties will also eventually go away.

Also included in the payment history is if creditors have sent you to collections. That means a creditor has decided to stop extending credit to you and has decided to collect the entire balance of a loan. This comes about after you’ve violated the terms of the loan, often missing several payments. Needless to say, collections aren’t good to have on your credit report. Paying them off helps stop any collection efforts and will limit the damage to your credit score.

Another item in your payment history that could hurt your credit score is if you have declared for bankruptcy. Even though a bankruptcy doesn’t show up in your credit report forever, while it does your score suffers. Just like late or missed payments, the older the bankruptcy is, the less it affects your score.

The good news is while you pay on time for your car loan in Scarborough, that helps build recent positive payment history. That in turn will help boost your score.


Potential creditors want to know how much debt you’re carrying at any given time. This is an important detail, since it tells them if you’re near the limit to what you can reasonably pay back. After all, they don’t want the loan they extend to you to be what sends you into the financial abyss. They also don’t want to lend to you if you’re already in well over your head.

Installment loan amounts are certainly a factor affecting your credit score. The total amount of all your debts at any given time is calculated, rewarding you for not having too much debt. When you buy a car, it’s wise to go with an option which suits your needs but isn’t overly expensive.

Your credit score is also calculated by comparing the limits on revolving credit lines with how much you’re actually using at the moment. For example, if you have a credit card with a $1,000 credit limit and you have a balance of $600 on it, you’re using 60 percent of the credit line.

While never using revolving credit lines doesn’t help much with building up your credit score, carrying too large of balances on credit cards will actually hurt your score. The general rule is to keep your revolving credit usage at 35 percent or lower than the limit on each account.


The mixture of credit accounts you currently have now and had in the past is also a factor used in calculating your credit score. While this isn’t a huge contribution to that final number, you still should be aware that it is considered when you apply for a car loan in Scarborough or anywhere else.

Having both secured and unsecured loans as well as installment and revolving lines of credit is a good way to improve your credit score. Of course, a car loan is a secured installment loan. Credit cards are an unsecured revolving line of credit.

Credit Length

Everyone has some good times and bad times in life. Creditors are interested in how you manage your financial obligations through both, so the length of your credit history is a fairly big contributing factor to your credit score.

While plenty of people are extremely good about making payments on a newer loan, there’s the possibility that they might become less vigilant later. Behavior over a longer period of time is a better indicator of a person’s spending habits and whether or not you’ll be capable of paying back a loan.

This means that the longer you’re paying on a car loan, the more it will help to improve your credit. Since most loans last for several years, that’s why they’re great for helping boost a person’s score.


Finally, there are new credit inquiries that have an impact on your credit score. An inquiry is when someone looks at your credit report, like when you apply for a new line of credit. It’s only inquiries made in the past year which are used to calculate your current score.

Of course, when you’re looking to get a new car loan or other forms of credit, you might apply with several potential lenders. Each one might pull your credit report, and that means an inquiry. That’s not unusual for anyone to do. Still, some consumers worry that shopping for a new car will hurt their credit. As long as you don’t keep applying for car loans for months, this shouldn’t negatively impact your score. After all, creditors don’t want to discourage you from shopping for a car or trying to obtain other forms of credit.

What will hurt your credit score is if you’re constantly applying for credit throughout the year. That can signal money trouble. Sadly, there are some people who try the strategy of getting new credit accounts as a way to manage current debt. That’s not a good idea since the result can be a crushing amount of debt, plus that kind of method to managing your finances will hurt your credit score.

Building Positive Credit

Since you now know the different factors used to calculate your credit score, you understand the importance of a positive credit account. Since you need a car to get around anyway, going with a car loan to get something nicer and newer is a smart move.

Just like with constructing a structure, building up your credit can take time.

As you pay on your car loan, you build a positive payment history. This demonstrates to future lenders that you can manage making payments on time consistently. The amount of debt you owe also decreases over time, which helps to further bolster your credit score.

More Manageable

While it might not seem apparent at first, getting a car loan is a more manageable way to build your credit score up. Because the payment amount you need to make each month stays the same throughout the life of the loan, you can plan better for it in your budget.

Not falling behind on things is wise for building your credit score. As you’ve already learned, late payments have a negative impact on your score, so knowing how much money you have coming in and what you need to pay out is key. A predictable loan payment amount month after month is wise.

If you choose to rebuild your credit with a revolving line of credit, such as a credit card, that monthly payment amount can vary wildly. That makes planning your budget far more difficult, possibly leading to surprises which put you in a financial pinch.

With your car loan you know what time of the month it’s due and the exact amount, which never changes. That predictable nature of a car loan can be comforting, while simultaneously building your credit score.