2 Ways to Improve Your Credit Rating

February 7th, 2017 by

Lease or Buy

If you’re looking to improve your credit score, probably the last thing on your mind is a big purchase. What if you knew that there was a big purchase that would really improve your credit rating? Would you want to know more?

First We Should Break Down the Way Credit Works 

Your credit score can range anywhere from 300 to 850. 300 is bad credit; 850 is perfect credit. The higher your credit score the lower risk you it is for companies to offer you loans. Since your score is associated with good credit the higher it is, it becomes easier to receive loans with lower interest rates when you pay on things like a credit card, car or house. Your credit score is like a record of your payment history and it follows you around everywhere you go.

Another way of putting it is that your credit score is your personal history of how you pay back transactions that you didn’t have the funds for initially. A small mistake with this can cause your record to tarnish!

For instance, people with poor credit ranging 300-550 could end up paying $14,000 in interest for merely a $25,000 new car loan. That means one with bad credit could pay $39,000 on a $25,000 vehicle!

Let’s see what someone with good credit could pay for the same $25,000 car loan. Someone with a score of 740-850 could pay roughly $3,000 in interest for the $25,000 loan. That’s $11,000 less than a person with bad credit.

Your credit score is quite important!

How to Improve Your Credit Score

Leasing A Car to Improve Credit

One effective way to improve your score is to lease a car. It can actually put your credit score in a much better place since 35% of your credit score is determined by your past payments. Leasing a car is a smaller, affordable payment that you can make monthly and each time you make that payment you’re directly improving your credit score. After a year or more of leasing and paying each monthly payment, your score will be greatly improved. You’ll kill two birds with one stone: pay off a loan that benefits your credit score and drive a new car!

Leasing a new Toyota may be more affordable than purchasing it if your credit is not excellent. You can lease, drive a new car and work back some of your lost credit simultaneously. And in the future you’ll get a lower interest rate when purchasing a new car.

Buying a Car to Improve Credit

Unfortunately, people with lower than average credit ratings will have a tough time getting a manageable interest rate. There are a few levels of credit that exist in ranges like these below:

  • a score of 550-620 is considered subprime
  • a score of 620-680 is considered acceptable
  • a score of 680-740 is pretty good credit
  • a score of 740-850 is considered excellent credit

If you have subprime credit (550-620) your interest rate on a loan may be 7% more than what it would be on the same loan if you have acceptable credit (620-680) (according to credit.org). This is around $6,000 during a five-year loan.

For someone in this scenario buying a car is probable a better option. Why? Because a lease can be more high risk, even though you still must pay your payments on time, it doesn’t require a down payment.

Deciding Between Leasing and Buying a Car to Improve Credit

Ah the good old dilemma – should you buy or lease? You may not like the answer but….it’s your decision!
You know what you’re comfortable with. However, here are some things to consider that may help guide your decision.

Benefits of Leasing a Car

  • Leases generally have more affordable payment schedules (perfect for college students who are paying loans and other expenses. Check out Toyota’s College Graduate Program)
  • You give back the car at the end of your lease. If you still don’t know what your dream car is, you don’t have to dish out loads of money for a car you may not like in a couple years.

Benefits of Buying a Car

  • Buying a car builds equity while you’re paying off the loan.
  • You won’t have to worry about paying fees if you drive over a maximum mileage requirement like a lease has.
  • You won’t have to pay a penalty if you want to return the car sooner than the lease ends. (this may be considered faulting on your loan which can negatively impact your credit rating.)

When you are choosing between these two options you’ll need to consider your current credit score, you’re financial situation, how long you’ll need your car and what you’ll need it for. Here’s where we come in. We work with you to make sure you find the car of your dreams that is perfect for your life. If you are looking to improve your credit score, contact us today and we can help you choose whether to buy or lease a vehicle at Vanderstyne Toyota. We stand by it that buying or leasing a vehicle is one of the best options available for improving your credit.