Buying a Car on Credit to Build Credit is a Bad Idea

Good Credit! Bad Credit! No Credit! ... Bad Idea

Another bad way to establish a credit history is by purchasing a vehicle from a dealership that advertises "Good credit! Bad credit! No credit at all!" If you currently lack a credit history, you're already doing better than a lot of people because you are probably debt free. Don't ruin that sense of financial security by incurring thousands of dollars in debt to buy a car. An expensive car is not a necessity, and you'll almost always be better off financially if you stick with whatever vehicle you can pay cash for.

However, if you are already planning to buy a car with cash through a dealership, you can go ahead and take out dealer financing to purchase the vehicle, and then pay the loan back in full after you've made just one monthly payment. This way, you'll pay minimal interest, but you'll establish a reportable history of responsibly using credit and making a payment on time. Some people have even gotten better deals on vehicles this way because the dealership makes so much of its money from financing auto loans. They might give you a lower total price if they think they'll be making interest off of you, so even though you'll have to pay a month's worth of interest under this plan, you'll probably come out ahead because of the lower price on the vehicle. Just make sure that you understand the loan terms and that there is no prepayment penalty before you sign next to the "X".

While this tactic won't help you with the length-of-credit-history component of your credit score, it might give you the boost you need to get an unsecured credit card which you can then hang on to for years. (If this good credit score business sounds like nonsense to you, you do have alternatives to playing the game; to learn more, see Can You Live A Debt-Free Life? and Nine Reasons To Say "No" To Credit.)

Related Source: What Your Credit Score Says About You