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Why avoiding debt harms your credit score

Why avoiding debt harms your credit score

Sound counter intuitive right? You would think someone who saves all their money, are sensible with outgoings, keep all loans paid in full, pay cash for as much as possible and pay their bills on time would have a fantastic credit score wouldn’t you? In fact, the opposite is true.

If you avoid credit or debt altogether, you may have trouble getting a loan for anything, including a car loan.

You need some debt

Banks and other lenders use behavioural analysis to assess whether you’re a safe bet or not when you apply for a loan. Part of that analysis looks at previous credit and financial behaviour. Lenders are looking for a past history of clearing debt, of making payments on time and of using credit responsibly. If you pay cash for everything, you won’t have a credit history.

So rather than celebrating the fact you’re fiscally sensible, you are penalized for not having used credit at all. On the surface that seems absurd but once you realize that essentially you’re an unknown quantity as far as the lender is concerned, it makes a little more sense.

Start using credit

The easiest way to overcome this lack of history is to start using credit. Get a low interest credit card and buy your gas or groceries with it. Make sure to clear the outstanding balance in full at the end of every month and it won’t cost you a thing. Over time, you will begin creating that financial history that lenders use.

If you go on vacation, pay for that using a credit card. Use the card wherever you think reasonable and where it won’t cost you much, or anything at all. Always pay it off in full and your score will begin increasing. It will take between 3 – 6 months to see any increase in your credit score but after that, as long as you never miss a payment, you should see a slow but steady increase.

Once you have a credit history, you can begin planning for your credit future. You should begin having more car loan options, lower interest rates and more lenders willing to work with you. From there, continue being fiscally sensible but use loans and credit where appropriate and where they won’t cost you too much extra.

If you need help or advice on car loans, or want to apply for a low cost car loan, Car Nation Canada can help. We have experts on staff who can walk you through the entire process. Visit your nearest location to see what we can do for you!

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