There are many different ways to build a credit score and establish good credit. Unfortunately, some of the advice that is often given is just plain false. For example, some people recommend only using cash, no loans or credit cards, to build good credit. This actually accomplishes nothing – you don’t build any credit score at all.

However, there are strategies you can use and advice to take that actually works. One such piece of advice is to use an auto loan to build good credit.

Years of Behavior
Credit scores aren’t built overnight. They take years to accumulate. A car loan is something that generally takes a few years to pay off. Making constant payments over a period of time is a fantastic way to build a strong credit history and credit score. However, if you miss a payment or are late a few times, then this strategy can backfire. You can harm the credit score you were trying to build.

Easy to Obtain
Car loans are often quite easy to obtain. Additionally, if you’re in need of a car then it’s a great way to accomplish two steps at once. Most car dealerships and banks are happy to give car loans to first-time buyers.

A Caveat
As a first-time car buyer and borrower, you’re a credit risk - even if you've never paid a late bill. This is because you have no prior credit history, or a very short credit history.

Unfortunately, this means you'll likely have to make a higher interest payment on your car loan. You can reduce the amount of interest you pay by taking a shorter car loan. For example, instead of a five-year loan, you could take a three-year loan. You’ll still earn several years of credit history and you’ll pay less in interest.

You can also make more frequent payments or pay off your loan early. Paying off your loan early not only saves you money on interest, it may boost your credit score faster as well. You can also put down a larger down payment from the beginning or refinance later to get a lower interest rate.

Buying a car with a loan can help you build a good credit score. Before you head to the dealership or to the bank, though, check with one of the three credit reporting agencies and make sure your existing credit score is true. Make sure there aren’t any mistakes. That way you’ll be starting your good credit quest on the right foot.