Any point to get an auto loan?

[Anonymous]

How much of a difference does an auto loan make to a credit score? I know, score will go down before it goes up. But will it help or hurt?

Buying a car soon. Which plan is better:

A) Buy it outright with no loan, no credit HP

B) Take a 3 year loan for part of the cost

Assume I only care about my credit score in making this decision. In fact, both A and B are borrowing at the same interest rate. In A, I borrow the money from my existing HELOC in Canada but that is invisible to the US credit system, it looks like I pay in full with cash here.

So it comes down to which is better for my score: taking the new account and utilization hit in order to establish an installment loan, it borrowing outside the US at effectively the same interest rate and staying in the garden in the US.

Rest of my history is in my siggy with hovers. Short history.

[jamie123]

With only FICO scoring in mind this is the best use of an auto loan:

Get the longest term possible where interest rates are still reasonably low. That might be 36, 48, 60 or 72 months. The definition of "reasonable interest rate" is your call.

Get the loan with the absolute minimum down payment possible while still maintaining reasonable interest rates.

Make the first month's payment.

Pay down 20% of the loan's principal with the second payment.

Keep making regular monthly payments until the loan is paid off.

Your scores will drop a bit with the new loan but will recover and start climbing once the 20% principal payment is reported. You are jump starting the good points part of an installment loan once 20% of the starting balance is paid off.

Installment loan balances don't count in the UTI calculation. The UTI calculation uses only revolving CLs.

The installment loan calculation uses the ratio of remaining balance/starting balance.

As far as how many points an auto loan can add to your score is a question that has been debated for quite some time on these forums. People have reported up to 40 point losses when their auto loans have been paid off and those aren't all the points the loan represents. Just by having a closed auto loan on your reports will keep your score higher but nobody knows by how much.

You can also boost your scores with a shared secured loan and not pay nearly as much interest as an auto loan.

[takeshi74]

It is never recommend to take out an installment for scoring purposes.  Take one out if your financial needs dictate it.

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@Anonymous wrote:
So it comes down to which is better for my score: taking the new account and utilization hit in order to establish an installment loan, it borrowing outside the US at effectively the same interest rate and staying in the garden in the US.

It's always difficult to guess about specific score impact (which varies by model as well) even with all the data which includes a full understanding of your credit profile as it's never just about the change itself.  You'd probably just trade off points or lose overall.  Revolving utilization is a bigger factor than mix of credit.  Consider that it's not just utilization and new credit but AAoA as well that would be impacted.

http://www.myfico.com/crediteducation/whatsinyourscore.aspx

You're talking about improving 10% at best while impacting 60% to some degree.

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@Anonymous wrote:
Short history.

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You can do the math to determine impact to AAoA.

I'd advise not looking for shortcuts.  Building credit takes time as well as responsibility.  Be prepared to be in this for the long haul.  As is frequently stated, it's a marathon, not a sprint.

[flan]

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@Anonymous wrote:
How much of a difference does an auto loan make to a credit score? I know, score will go down before it goes up. But will it help or hurt?

Buying a car soon. Which plan is better:

A) Buy it outright with no loan, no credit HP

B) Take a 3 year loan for part of the cost

Assume I only care about my credit score in making this decision. In fact, both A and B are borrowing at the same interest rate. In A, I borrow the money from my existing HELOC in Canada but that is invisible to the US credit system, it looks like I pay in full with cash here.

So it comes down to which is better for my score: taking the new account and utilization hit in order to establish an installment loan, it borrowing outside the US at effectively the same interest rate and staying in the garden in the US.

Rest of my history is in my siggy with hovers. Short history.

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Do not forget to consider the currency risk in borrowing money in Cadanian rupees and paying in US Dollars.  The cad is currently worth about $0.83 US.  So, you'd need to borrow $12K cad to have $10K USD.  Three years ago, they were worth about the same.  if that happens, you'll end up paying a much higher US dollar amount to repay the loan.  Of course, if the candian dollar continues its slide relative to the USD, you'd be repaying less. 

Assuming your income is largely in USD, I'd get a loan denominated in USD.  If your income is candadian pesos, you can get a candian loan. If it's both, then it's a much more interesting question.