Buying a car to establish credit?

A friend has recently returned after living abroad for the past year. She is looking for short-term work and needs a car. Her family is urging her to take out a loan for a late-model used car, primarily to establish credit. She is hoping to buy a home, but not for the next five years or so. She currently has two credit cards that she pays off every month, with occasional exceptions (fewer than one per year, and she always pays off the balance promptly).

However, she is planning to leave for another stint abroad within a few months. While she returns regularly for stays of one to three months, she plans to continue this globe-hopping lifestyle for the next few years. Of course, she could resell it at that time, but her folks are emphasizing the credit rating issue and warning of dire consequences to her future if she doesn’t establish a credit history. So the car would be left sitting (or used by another family member) most of the time she owns it.

Are they right? It seems silly to me to commit to several years of debt just as a demonstration of fiscal responsibility. I tend to think the credit cards are enough for now, assuming she continues to use them wisely, to maintain a favorable credit score. Presumably in five years she could return, procure permanent employment and take on a car loan at that time, then in another year or so be in a position to start house- (and mortgage-) hunting. IMO buying a car now would do little to improve her standing and will be a large expense for little reward.

I am, however, the worst person to ask about this issue, since I am twenty years older, have never tried to finance a house, and have only had one car loan in my name in my lifetime. So I turn to Dopers for their opinions. Are the parents right? Other things being equal, would paying on a car you’re not using for three to five years be a smart move for one’s long-term financial soundness?

I agree that it doesn’t make sense to buy a car you won’t drive much in order to get the side benefit of establishing credit. It’s similar to people who argue that you should buy a house because you get to “write off the interest”. They usually don’t even know what that actually means.

She should check her credit score/report to what her current credit worthiness is. And buying a car when you don’t need one is stupid.

When my brother and I bought our first cars, my dad offered to co-sign. His credit score was off the charts, like 810. The loan guy told us that the loan APR would be based on dad’s good credit score, because my brother and I would actually co-sign for HIM, and the credit reporting would apply to both our credit scores and dad’s.

This worked out fine because my brother and I had no desire to mess up dad’s credit or our own, and we never missed a payment.

So, if your friend’s family insists that she take on a loan for a car, she could do what we did - co-sign with a trusted family member. When she leaves and leaves the car behind, the family member would drive the car and make payments. The credit reporting would apply to both of their scores.

Caveat: co-signing on a loan can just as easily screw up your credit. Only do this if you seriously seriously seriously trust the co-signer and/or can make the payments yourself if your co-signer flakes.

This is a stupid idea if having good credit is the primary goal. All Americans are entitled to their credit reports from the 3 major credit reporting agencies for free once every year and you can pay a fee to get them more often if you want to but that shouldn’t be needed right now. She may have to pay to get her actual FICO score which is the major number banks use when issuing a loan but just seeing what is on the current reports is both educational and can allow you to correct any errors on them.

Credit scores have little to do with assets and nothing to do with income so a person with a few lines of credit and pays them off on time should have a good credit score already. You just have to look at the current reports and see where they stand and fix any problems with the agencies if there are any.

Anyone can get there credit reports completely free here:
https://www.annualcreditreport.com/cra/index.jsp

I’ll admit to not really understanding the world of credit as much as I should.

Wouldn’t buying a TV or recliner work in the same way to establish credit, just smaller?

There are some other tips too that lots of people don’t realize. The credit reporting agencies don’t count anything less than 30 days late as being late at all even though the credit card companies will but that doesn’t matter for these purposes. Utility bills and things like that don’t count at all either in general. They look at credit line payments and not bills. The exception would be if something goes to a collection agency but you didn’t indicate anything like that. If things are as stated, it is likely, she already has good credit and her family is simply ignorant of that fact and doesn’t understand how these things work.

That is why it is important for people to actually look at their own credit reports and see what they are recording and what they are not. If you have two bills to pay and can’t afford both of them at the same time, pay the credit card and not the electric company because the former could impact your credit score and the latter will not.

It all depends on whether the lender (whether it’s a credit card or a loan) reports it to the credit bureaus. Having a credit card helps you build credit, even if you pay it off in full every month. Getting a loan that is reported to the credit bureaus helps build credit.

Having my electricity turned off for non-payment would most certainly impact me, if not my credit score.

FWIW I’ve always had good credit and I’ve never had a car loan. When I got my mortgage all I had on my credit report was a bunch of credit cards and one student loan, everyone seemed perfectly happy with my score.

I would tell your friend to buy a copy of “Personal Finance for Dummies”, I got a copy for my boyfriend a few years ago and I thought it was a good overview of the basics for someone who’s never had to think about this stuff before. I’m sure there’s similar books out there that are also very good.

Yep, her family is being lame. Neither my husband and I ever had a loan on a car, just credit cards (oh, and I had a student loan, though my husband did not) which we paid off every month, and both our credit scores are excellent; we had no trouble getting a house loan. But as others have said she can check this for herself.

Actually getting in debt for a car may have a negative impact on her house-buying ability, as on our loan documentation we had to list all the debt/loans we had outstanding (we didn’t have any, but if we had it would have counted against how much house we could buy).

Perhaps her family really wants to use the car for themselves while she’s gone and that’s why they’re being so insistent? :slight_smile:

I just meant if you have to pick which bills to be late with in the case of a money emergency, it is easy to figure out which ones of those should be from a credit score perspective. The electric company doesn’t usually shut off people’s electricity for one late payment as long as you make it up later.

It would bump her score up to show an installment loan reporting as being successfully paid off versus solely revolving debt. You can have a good credit score without this certainly, but it will give you a better score to have it. My take is it won’t be a big enough difference to make it worthwhile for her to buy a car she doesn’t really need or want.

Also - she may have trouble getting a car loan at a decent rate, short of going to one of those places that’ll finance ANYONE for a steep enough rate.

Heck, if all she wants to do is establish credit via a revolving loan… have her put some spare cash in a savings account. Use that savings account as collateral for a loan. I know, sounds crazy, but we did that once when buying a computer - we had the cash, but wanted to make sure we still had the cash a year later, and figured if we paid the loan monthly we would - whereas if we paid cash for the computer, we would most likely NOT sock that much money away every month.

Anyway - rates for such a secured loan are VERY affordable. She can pay off the loan over a few months, be out of pocket only a tiny amount, and not be stuck with a car while she’s overseas.

But, I agree with everyone else, she doesn’t really need to take out ANY kind of loan, if she’s got US-based credit cards those are sufficient to establish her credit history. It would be worth spending the 10ish bucks to get her FICO score just to check, if she’s concerned.

Parents are retarded. This is especialy true if they just want her to establish credit to buy a house.

Hell, they’ve got fist time buyers programs where it seems the only qualifier is that you have a pulse.

Is that still the case? My understanding is that mortgage qualification has gotten strict again in response to the oopsie. And since she’s five years out from buying, what will standards be then?

It was that easy for me. Bought a house last April with a pre-approved loan. I called my bank, they faxed over the application, I completed and returned same, thirty minutes later they called offering to loan me more than I wanted to spend. I was pretty surprised, because I thought loans would be very hard to get. Then again, I got a VA loan from a prime lender. It may be harder for non-veterans or people in the sub-prime market. I definitely recommend getting pre-approved. That way, you know what you can spend and you know the financing is there before you even start looking at houses. It would really suck to pick out a house you like and then have the deal fall through because you can’t get financing.

It was pretty easy for us too (we just did this last month). I think if you have a 20% down payment and not an absolutely terrible credit score or mounds of debt, lenders are ecstatic. There are a lot of people out there who don’t fill those requirements, and I think it’s getting more difficult for them.

Now, they were pretty anal about things, mind you. The best being when they wanted us to tell them who pulled our credit report last month. “Uh, that was YOU, remember?”

If she’s just looking to get credit and a good rating, Gasoline Cards are the best first step. This is followed by department store credit cards like JC Penny, Walmart and Sears etc.

Once you start this for a few months, then she can get a Visa or MasterCard. The trick is once you get that, you have to buy a large purchase, between $500 and $1,000 and pay it off over a few months. Paying it all off at once, makes financial sense (avoid interest) but it fails to show you can pay on time and plan.

Buying a car can establish credit as well, but it’s not really needed. Even with horrible credit you usually still can buy a car. You just pay a lot, and I mean a lot, more for the interest. After all the car is your collateral.

It makes much more sense in her case to save that money for the downpayment on her house.