Getting a car loan doesn't have to be a nightmare, even with bad credit.

How to: Build Credit for an Auto Loan

last updated November 13, 2013 by

One of the first purchases that young professionals make is usually an automobile.  Whether new or used, an automobile represents a huge increase in mobility and independence for recent college or high school graduates.  Unfortunately, cars are quite expensive, and they normally require some form of financing to be affordable.  The following tips will help you build your credit history so you can eventually receive good interest rates on auto loans.

Why is Credit Important for Auto Loans?

Your credit score, or credit history, is a method by which banks and lenders assess your trustworthiness when it comes to paying back loans.  Credit history is built gradually through credit card transactions, loans, mortgages, and even utility payments.  As you go through life, you will accumulate a thick record of historical information that banks will use when determining your interest rate.  In general, people with low credit scores end up being denied for more loans, and they pay a higher interest rate than people with good credit scores.  As a young person, it is very likely that you have no credit history at all.  Unless you have had credit cards in your name, usually cosigned by parents, you might be starting with a blank slate.  Banks shy away from lending to people without credit histories, as they have no way of assessing the risk of those loans.

Building your First Credit

One of the easiest ways to begin building your credit is to have a secured credit card.  These credit cards, usually with very low limits, are pre-funded by a checking account through the same bank.  Much like a gift card, they are only useable when there is enough in the checking account to cover the balance.  While these are not as flexible as traditional lines of credit, they still provide valuable information to the credit reporting bureaus and can begin establishing your credit.

Maintaining a Good Credit Score

Ensure that you always pay your bills on time, never going into collections for any reason.  If you miss a payment on your bills, immediately contact the lender or utility company to let them know that you are sending a payment post-haste.  Missed and late payments are negative marks on a credit score, and if a bill goes into collections it can destroy your credit for years to come.  One trick to maintain a good credit score is to open a few lines of credit, but always pay them off by the end of each billing cycle.  Credit bureaus  consider your credit utilization ratio when assigning a score, so use as little of your credit as possible.

Finding an Auto Loan with no Credit

For many people, it is simply impossible to wait a couple years to buy a car while they build the ideal credit score.  It is certainly possible to find a loan without a good credit score, it just takes a bit of shopping around.  Many online lenders, such as Complete Auto Loans, offer fair interest rates to people who are just getting their credit established.