The belief that car loans are necessary to build credit is a financial fallacy primarily due to the belief that there are no other methods to boost one’s credit. It’s crucial to remember that car loans, like any other form of debt, can have both positive and negative impacts on your credit score. For instance, if you promptly pay your car loan, it can positively impact your credit. However, if payments are missed, this can put a dent in your credit score. Furthermore, taking out a car loan means that you’re committing to paying interest which isn’t necessarily beneficial to your financial health if not necessary.
It’s understandable why someone might believe this misconception. After all, car loans are often marketed with this added “benefit” and are such a common debt that people assume they are a necessary step. Moreover, the idea that taking on larger debts builds credit faster can seem intuitive, as it’s a bigger proof of trustworthiness to lenders. Yet, significant financial decisions should not be dictated solely by the prospects of credit building.
Credit can be built in a variety of ways that do not involve taking on an auto loan or any significant debt. For instance, responsible use of a credit card, paying utility bills on time, and small personal loans can also build credit. Maintaining a healthy mix of credit, paying all dues on time, and keeping your credit utilization rate low are some of the practices that help build good credit score.