Theoretical Scenario: You have 2 credit cards with no balance and no late payment. However, you plan to buy a house in the future. To get the lowest mortgage interest rate in your future buy, you have to get the highest FICO score possible to qualify. You are buying your first car. You have available money to pay for $40,000 car...cash if you have to... How do you configure your auto loan to get the highest FICO score later on? Possible choices: A. Pay the car in full ...cash now B. Loan the Full Amount ($40,000) C. Loan with downpayment for X# of months If you choose C, How much do you loan? How much will be the downpayment? How many months? (To get the highest FICO Score + Low Interest to the bank)
Credit mix only counts for about 10% of your credit score, so having the perfect mix is like icing on the cake. It's not really the foundation of your score. If you already have a credit score in the upper 700s or higher, choose the financially smart move and take option A - buy the car in cash. That said, if you really want to get an auto loan on your credit report to improve your overall credit mix, I like Option C...put 50% down, and finance $20K over 48 months max. Hope you negotiate a sweet deal on the car too! $40K is a nice chunk of change.
1. Is 50% downpayment the perfect balance of max fico score and least interest yield for banks? Or the greater downpayment, the better? 2. Would 1 year loan term be a good credit "history" for FICO score? 3. How does 1 year loan term compare to longer loan term (2,3,4 years) in terms of fico score? Thanks
You really need to balance good financial sense with your desire to maximize your credit score in this scenario. A 50% downpayment isn't some magical number. In fact, the FICO scoring model will never know how much money you put down on anything. It will only know what your original loan was and how much remains on the balance. I just said 50% because these days it's nice to hold onto a little cash while still making a sizable downpayment that yields an affordable monthly payment. Good payment history is King in the FICO scoring model. It counts for 35% of your FICO score, and length of credit history makes up about 15% as well. So, in theory, the longer the term the better - as long as you pay on time. However, back to my original point, you need to balance your decision with what makes sense financially. You don't necessarily need an auto loan to have a good credit score.
One thing to consider, though, is this. If you're going to buy a house, the wisest move may be to finance the car or a large part of it. That way you have the cash for any unexpected expenses in the home. I hate to see people get in mortgage trouble because they used their cash to buy something else. Look around--there are car loans for 4% or less.
