I have a theory & I'd love for someone to validate or disprove it: We know that interest rates depend on a mix of positive credit history, including loan history. If you take a person who has a good credit score but no loan history, I assume their mortgage rates would be pretty high, since there would be an automatic strike for being a first time borrower. My theory is if that person has a successfully closed car loan (ie. financing a new car), it should significantly & positively affect the mortgage rate that they're able to get in the future. (This would be an argument for the person to finance the new car rather than pay in full, even if their rate isn't great for this first loan). Any thoughts / agreement / disagreement?

What is the credit score based on if there's no loan history? I was not aware that banks base the rate on something other than credit score. Whether this is a good idea or not is a separate discussion that I have a lot to say on lol

Credit score was based on good credit card management over many years

I don't think banks differentiate for mortgage rates. But I can't say that with certainty

Just thinking back about my first mortgage. We got a great rate, I think solely based off credit score which was credit card history. Maybe there were student loan payments as well at that point though...

I got the top rate solely based on credit card payment history.

Interesting

IIUC credit scores aren't a hard science, but interest rates at a bank given a certain credit scores are. Whenever I've spoken to banks they've always asked about credit score to give a rate, and we only went deep into personal history during the closing process which wouldn't change the rate, just whether they actually give the loan.

Ah that makes sense. Capital One's rate was a pre-approval -- maybe they didn't even check my credit score 🙁

If you're looking for a loan, definitely call around a few banks. Every time I've gotten a loan I was able to get significantly better at one or another. Some may even "rate match". But they do fluctuate day to day

For context, we're buying a new car iyH & thinking about financing it if we get a good enough rate. We also hope to buy a house sometime in the next 5 years, hence the question of does one affect the other.

What DOES affect your credit score is the ratio of money you have available to money you owe. I hope someone can give a better explainer here but financing can impact your credit score in a negative way as well!

I took out a car loan around 2017-2018. Lightstream was by far the best rate back then. No lien either and they didn't care how much I paid for the car. They just wired the money same day into my account.

(but fwiw if you have the money, you can finance it now, then pay it off before you look for a mortgage)

What DOES affect your credit score is the ratio of money you have available to money you owe. I hope someone can give a better explainer here but financing can impact your credit score in a negative way as well!

I believe you're referring to revolving credit (credit cards), where percentage utilization plays a big role. If you have $100k total credit lines on cards with balances totaling $10k, that's 10% utilization. Separately, for mortgage approval (not credit score), your debt to income ratio (DTI) is looked at. I believe debt is counted as required payments, so minimum payments for cards, and monthly loan pmts on e.g. auto loans. DTI needs to be under some amount. For some reason 38% is in my head, but not sure that's correct.

I've asked a mortgage broker this exact question, wondering if I should take out a car loan and pay it back quickly just to build credit. He told me it's not going to help me since I already had a high credit score based on my credit card payments

@nutritious-raincoat-28876 tysm for the better explainer!

@creamy-spoon-14332 high, like over 800? or even 700+ or 750+? What you heard aligns with what others said earlier in the thread (ie car loan isn't more helpful if credit score is already good) but want to make sure we're all talking similar language for what credit score range this applies to

I believe mine was above 775, can't remember exactly. It's been a few years and I already got my mortgage bh

Hard to get your real credit score, but my understanding is 760+ gets the top rate

Your credit score is calculated differently for different types of loans. If you don't have a credit score you can use manual underwriting (a favorite of Dave Ramsey). But I believe its a lot more complicated to deal with.

The mortgage broker should be able to tell you whether your score is good enough. Can't hurt to reach out now in case it needs to be improved.