As a recent college grad with little money and no assets to my name — wait, does a laptop that costs more than I could get for my kidney count as an asset? — I just stumbled my way through the process of buying a new-ish, shiny car that’s all mine. I have the hefty monthly payments in my name to prove it.
There’s a lot not to like about car buying: the way dealerships won’t stop calling you; how you have to look at approximately 800 cars to find one that might work; the fact that you can’t afford any of the cars you actually like and will probably have to settle on a used one with suspicious stains on the ceiling.
But throughout the whole process, my least favorite part came to be when I’d settle on a car and sit down to talk money. I knew what I wanted to spend, but it was up to the banks what type of interest rate they would give me on a loan. That would, in turn, determine my monthly payments.
[For tips to get the best auto loan possible, check out: Building Credit to Get Auto Loan Approval.]
Inevitably, of the five or six dealers I talked to, they all asked me if I had ever taken out a loan before. I proudly said, “Nope, never!” I glossed over the several thousand dollars I’ve racked up on my credit cards and focused instead on the fact that I made it out of college without taking out a single student loan.
But the salesmen would always frown! Oblivious to my pride, they would wilt visibly, make a little note and trudge on with their line of questioning.
How having no loans may have hurt me in this case
I didn’t get it. Weren’t congratulations in order for this miraculous feat I had pulled off? Millions of students in the U.S. have racked up more than $1 trillion in debt, but I made it out! That’s good … right?
Finally, I asked someone what his problem was, and he told me: Banks would want to give me a loan if they saw that I already had one from someone else, and was paying it off responsibly. Not having one made me a bit of a gamble.
Are you kidding me?
Turns out, it was not a cruel joke, and the car salesmen were kind of right.
According to Equifax, one of the three major credit bureaus, creditors and lenders like to see that you have different types of credit lines, like credit cards, loans or mortgages. But they don’t like if you have too many.
So as someone who only had credit cards before and no other types of borrowing on my credit history, the car salesmen were worried I wouldn’t be an attractive borrower to the banks.
That small chunk changed my loan by a lot
It turns out, they were only looking at a tiny part of the picture. As Debt.com explains in its education center, only 10 percent of your credit score is made up of the different types of credit you have access to.
The rest of it has to do primarily with how well you make payments on time and your ratio of credit to debt. How long you’ve had those lines of credit, plus how many new lines you’ve opened recently, also factor into it.
All this research led me to the conclusion that they were placing a disproportionate amount of faith in the type of credit I may have had and overlooking what I know my real problem is: having high balances on my two credit cards and little credit available there.
Now, I definitely wish I had taken out a loan for my study abroad trip instead of putting it on a credit card. The more you know I guess.
In the end, I got lucky
Even though the salesmen had gloomy faces when they went off to check my credit, it all worked out for me in the end. A bank gave me the interest rate of a much older, wiser borrower — a better rate than I had dared hope for, which brought my monthly car payment to new lows. I could have wept in the tiny office.
But true to form, they were quick to shoot me down and cheerfully informed me that the particular bank that agreed to give me the auto loan had been giving out shockingly low-interest rates for the past month or two. They were sure to stop within the next few weeks.
I’m in the process of building my credit back to the “above average” range by paying my credit card bills and now my car payment on time and also seeking some extra income to pay them down faster. But in this case, I undoubtedly got a little lucky — especially because 2018 wasn’t even a good year to finance a car.
Taking out a student loan a few years ago would have been a much surer method to a low car payment now.