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I am buying a new car. I was going to just pay for it in cash, I don't like paying interest or having debt...
But then I decided - Why not finance the car, and just pay off the entire loan within the first 2 months?!
My idea is that I will still pay minimal interest (no early payoff penalty), but I will also build my credit by securing a new line of credit and then successfully paying it off.
Has anyone here ever done this? And if so, how has it impacted your credit score?
I am buying a new car. I was going to just pay for it in cash, I don't like paying interest or having debt...
But then I decided - Why not finance the car, and just pay off the entire loan within the first 2 months?!
My idea is that I will still pay minimal interest (no early payoff penalty), but I will also build my credit by securing a new line of credit and then successfully paying it off.
Has anyone here ever done this? And if so, how has it impacted your credit score?
Or any other thoughts/comments regarding this?
You can usually get a better sales price if you agree to finance through the dealership because will be earning a percentage of the interest on the loan. You then pay it off in 2 months.
Haven't done it, but.. If you can.. Seems like a good idea. You'll take a hit on your score for 2 months, but.. So what? Hell, the hit I took taking out a $29k loan in January was only like 10 points and i've recovered half of it already.
LAst three cars I bought I did just that. Reason being, I buy and then sell what I own. Then, money goes into the new car loan, if there is any balance - I pay it off in full.
Usually, 2 months is too much. Last one, I sold my car in 4 days to local dealer. For what i wanted for it. They called me and that was deal.
I don't care about FICO score, mine is up the roof anyway. It's just convenience to me.
Just ensure the loan documents do not contain the term "precomputed interest", which essentially means you're on the hook for the precomputed interest on the loan no matter how early you pay it off. I don't think this is that common any more.
I was prepared to pay cash for my last 2 vehicles. I found that the dealer was willing to make more concessions if I took out loans. They make money on that process.
It is true that having loans will increase your credit score. That just makes it easier to borrow even more. That is of limited or no value to someone who doesn't "like paying interest or having debt".
I am in no hurry to pay off my loans. They are at 3% or less. My investments return an average of more than twice that amount.
I was prepared to pay cash for my last 2 vehicles. I found that the dealer was willing to make more concessions if I took out loans. They make money on that process.
It is true that having loans will increase your credit score. That just makes it easier to borrow even more. That is of limited or no value to someone who doesn't "like paying interest or having debt".
I am in no hurry to pay off my loans. They are at 3% or less. My investments return an average of more than twice that amount.
The problem here (aside from the fact that market returns are not guaranteed) is that psychological studies have shown in a variety of contexts that people tend to spend more money when things are put on credit. If you could spend exactly the same amount one way or the other that is one thing, but in practice, knowing that one will part with all the cash at once will tend to lead most of us to spend more conservatively.
You may believe that you are immune to this, but as many infamous behavioral psychologists have shown (e.g. D. Kahneman and A. Tversky), much of our behavior is governed by unconscious biases. By definition, we are not aware of our unconscious biases - so simply believing you aren't subject to spending more on credit doesn't make it true.
I am buying a new car. I was going to just pay for it in cash, I don't like paying interest or having debt...
But then I decided - Why not finance the car, and just pay off the entire loan within the first 2 months?!
My idea is that I will still pay minimal interest (no early payoff penalty), but I will also build my credit by securing a new line of credit and then successfully paying it off.
Has anyone here ever done this? And if so, how has it impacted your credit score?
Or any other thoughts/comments regarding this?
The things that impact your credit score are:
- Recent inquiries
- New accounts
- On-time payments
- Longevity (Oldest credit line)
- Available credit
- How much of that available credit you're using
IMO, you'd probably lose some points for the inquiry and opening a new account. I don't think you'd gain points for on-time payments or longevity (because of the short two month span).
Available credit and credit used would not come into play (that's for open lines of credit).
If your goal is to increase your credit score, I would suggest paying it off over 12 to 24 months so that you gain points for on-time payments. I'm also of the mind that not all debt is bad debt (as long as it's a manageable amount).
That's just my inexpert opinion (I keep a close eye on my credit score and notice what causes it to fluctuate). If you go this route, I would be interested to hear how it affects your credit score.
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