Can Buying a Car Help Build Credit?

Higher consumer credit scores indicate that you are a good credit risk to potential lenders. Not only will a good credit rating help make you eligible for a loan, it can help lower interest rates on loans and lower insurance premiums. One way to build a good credit rating is to take out a loan or open a charge account and make timely payments. Qualifying for an installment loan and buying a car is one way to help build your credit score.

Car Loans

Most car loans are installment loans, with the principal credit balance being reduced with each monthly payment. Buying a car through an installment loan gives you fixed and equal monthly payment amounts for the life of the loan. Your credit score calculations weigh the types of credit that you use as 10 percent in the overall credit score calculation. You can build your credit faster if you have a mix of both installment credit accounts and revolving -- credit card -- accounts.

Outstanding Debt

One of the primary factors credit reporting agencies consider when calculating a credit score is the ratio of the amount of debt that you owe to the amount of credit that is available to you. In terms of an installment car loan, the initial credit amount is constant, but the outstanding debt portion is lowered with each monthly payment. As time passes, each monthly payment you make will positively impact the outstanding debt portion of your credit rating. Outstanding debt ratio accounts for 30 percent of the overall score in a typical credit score model.

Timely Payments

The best way to build a good credit score is to pay your bills on time. After buying a car, make your monthly installment payments before or by the due date to receive a positive entry on your credit report from the lender. A consumer's payment history impacts 35 percent of his overall credit score; it is the single largest factor that credit reporting agencies consider in their calculations.

Credit History

The longer you make timely payments on your car installment loan, the better your credit will be. Building good credit takes at least six months of a positive payment history. The length of time you have your car loan will also impact your credit rating. Potential lenders prefer to lend money to consumers who have a long history of positive credit accounts. The length of your credit history can impact your overall credit score by 15 percent.