Keep car payment to build credit?

[jacc1234]

I recently purchased a used honda fit and financed half of it, about 10k. Its a simple intereste loan at 6%. My credit score is decent 720 or so but I have never had a large long term loan before. I have about 7k in cash now that I can put towards the loan tomorrow but I would like to use this loan to possibly increase my credit.

The financial person at the dealership told me that I should keep paying for 24 months to increase my credit. Is this a good idea or is he just trying to make more $? If it would be a good idea to pay my loan off over 24 months is there any reason not to pay off 7k out of the 10k now and then just pay off the remaining 3k over 24 months? If he was just BSing me I have no issue having the car paid off in 6 months so basically the only reason I would do this is if it would really benefit my credit history.

 

[Vette73]

Pay it off ASAP. As long as you make 1 full payment on time it will show up on your credit report.

 

[jacc1234]

Ok, thanks for the info. I have read some places that say making monthly payments for a full year will slowly increase a credit score. I just wonder if the increase would be the same if I left say $1200 on the loan and then paid $100 a month for 12 months. I would end up paying $72 in interest on the 1200 i think.

 

[dfuze]

The guy at the dealership only gets a fee for originating the loan, after that only the lender makes more $ the longer you take to pay it off.

 

[killster1]

Depends on your contract, you are prob fine to pay it off now but i have seen them where you are stuck paying interest and all for the 24 months even if you pay it off in one day. (I always buy stuff with cash personally especially a 10k car)

 

[jacc1234]

Its a simple interest loan and I would only pay the interest for the amount of time I have the loan. If I pay it off tomorrow I wouldn't have to pay interest. The only reason im thinking about keeping a small amount financed is to increase my credit history and score.

If its true that keeping the loan for x amount of time would do that I would then like to know if the dollar amount somehow relates to the score increase or if I could leave $100 on the loan and pay that off over 24 months.

 

[Krazy4Real]

Get a credit card to build your credit history instead. Make a few purchases on it each month and pay it off when you get the bill. This way you can build your credit history and not be charged any interest.

 

[jacc1234]

I already have a credit card that i pay off. My credit score is decent. I was told that paying off a larger loan like a car without issue would be beneficial for getting something like a mortgage in the future.

 

[olds]

What's the interest rate?

 

[SooperDave]

What's the interest rate?

Read the OP again.

 

[HendrixFan]

The loan will show on your report for a minimum of 7 years on your credit report after the final payment is made. It could stay on there longer. The reason they told you to keep making payments is so they can keep earning interest.

If you want to increase your credit, get a few different credit cards and cycle through purchases on them but pay in full each month. Three to five cards should suffice for building credit quickly, plus utilization is a huge factor in the score. If you charge up $1000 a month and pay it in full each month, that is a good thing. However, if your credit limit is $2000 then they will see you are using 50% of your available credit each month and you will lose around 50 points (there are tons of variables but that is a good ballpark estimate). If you get a few cards and the total credit limit combined is $10000, then your utilization will only be 10%. Anything under 10% gets you the highest "utilization" score.

Another huge factor in score is average age of accounts. If you are establishing credit the only thing you can do about that is wait. Take a hit now getting a few different cards, preferably ones with rewards as long as you are paying in full, and hold onto those for years. Make purchases on each card at least every 6 months so they don't close it down for inactivity. Don't apply for new cards unless they offer huge perks, and if you do, don't cancel the older cards. As those accounts age to 7-10 years old and beyond, your score will go up dramatically.

 

[child of wonder]

6%? Ouch.

Go to Pentagon Federal Credit Union www.penfed.org and you can get up to a 60 month used car loan for 2.99%.

 

[blackangst1]

You FICO will take a small hit by paying it off. As HendrixFan noted, aging of accounts is what really bosts your score.

Also, as he mentioned, utilization is a key factor. 10% is a good amount. The flaw in paying in full every month is, if you pay before your billing cycle and before the card reports, it wont reflect on your credit report. There is ZERO difference between doing that and not using your card at all. When the card reports, it reports zero balance. Theres no difference whether it was used and paid and not used AT ALL. Best thing is to try and keep things around 10% utilization.

 

[Imdmn04]

I'll be the devil's advocate here.

Why sink all of your liquidity (cash) into a rapidly depreciating asset? You can use the cash towards investments, rainy day funds, etc.

Also, keep in mind a 4 percent annual return in some form of investment will be greater than the interest you pay on a 6 percent APR loan.

 

[Syringer]

6%? Ouch.

Go to Pentagon Federal Credit Union www.penfed.org and you can get up to a 60 month used car loan for 2.99%.

Except, you need to have military/gov't ties to join them..

 

[jacc1234]

Which I have neither.

 

[Eos]

I'll be the devil's advocate here.

Why sink all of your liquidity (cash) into a rapidly depreciating asset? You can use the cash towards investments, rainy day funds, etc.

Also, keep in mind a 4 percent annual return in some form of investment will be greater than the interest you pay on a 6 percent APR loan.

Is it better to be upside down (most likely scenario, even on a used car) and make payments for the life of the loan, and use what could have been given as a down payment for investing?

 

[sandmanwake]

Except, you need to have military/gov't ties to join them..

Not true. You can join the National Military Family Association, which anyone can join and then join Penfed. One time fee and open to anyone. It was how I got into Penfed and it's sanctioned by them: https://www.penfed.org/howtojoin/overview.asp.