Often car title loans are thought of as a way to get a loan without the need for a good credit score. This is true, in fact you easily get a car title loan with bad credit, good credit, or no credit. The loan is secured by your vehicle making them easy to qualify for regardless of your credit score.
One of the benefits of a car title loan is that they allow you to borrow money with no hard inquiry credit check (some lenders do perform a hard inquiry, so make sure to check before applying).
In addition to no credit check, many title loan companies do not report the loan to credit bureaus. This means the loan is not shown on your credit report. So, in these cases, your credit score is unaffected by a title loan.
Given that, is it possible to increase your credit score using a title loan?
The answer is yes, and in this article we are going to go over how to use a title loan to increase your credit score. It is a rather simple process than can have a fairly quick affect on your credit score. This depends on several factors such as outstanding debt and payment history.
To do this successfully you will need to make sure your lender does not report the loan to credit bureaus.
First, we need to understand some basics about how credit scores are calculated.
Key Factors Affecting Credit Scores
There are several factors that go into the calculation of your credit score. Each credit bureau uses a slightly different equation or algorithm for calculating your score, but they all place significant importance on outstanding debt.
There are various other factors that affect your credit including payment history, types of credit, number of inquiries, etc. For this strategy, we will focus solely on outstanding debt. More specifically, outstanding debt versus credit limits.
This is also called credit utilization. Generally, it is recommended that you keep your credit utilization under 30% to achieve a good credit score and under 10% for an excellent credit score. It is possible to decrease your utilization, and therefor increase your credit score, with a car title loan.
Other Credit Factors:
Other factors that affect your credit score include hard inquires, payment history, credit mix, and credit length. A car title loan will not have any affect on these, assuming you choose a lender that does not perform a hard inquiry.
So, how can you use a title loan to increase your credit score? Also, if this is possible, when is the best time to do so?
Using a Title Loan to Increase your Credit Score:
As discussed, outstanding balances (credit utilization) play a large role in calculating your credit score. This is roughly 30% according to most credit models.
The strategy of using a car title loan to increase your credit score involves decreasing your outstanding balances on your credit report.
Because there is no hard inquiry with a title loan, and no reporting to credit bureaus, the loan will not show up on your credit report. This does assume your lender does not perform a hard inquiry and does not report to credit bureaus. Confirm this with your lender before implementing this strategy.
Steps to Increase Credit Score with a Title Loan:
The first step to implement this strategy is to check your credit report to determine your utilization. It will be a percentage between 0-100. Next, find out how much you need to reduce your outstanding balances to lower your utilization to 30% or less.
For example, if your outstanding balances are $7000, your available credit is $10,000, then your utilization is 70%. To lower this to 30% you would need to decrease you outstanding balances to $3,000. You can accomplish this by repaying $4,000 of your outstanding balances.
In the above example you would get a $4,000 car title loan and use the proceeds to reduce your outstanding balances. By reducing your utilization from 70% to 30%, your credit score will increase and it will do so fairly quickly.
Benefit versus Cost
This strategy for using a car title loan to increase your credit score comes with a cost. Generally, car title loans have higher interest rates than many other forms of credit. Before committing to this, you will want to make sure the benefit from the higher credit score outweighs these costs.
This is different for every person depending on the reason for need a boost in credit score. In some cases, a job requires a credit check. The benefit of the improved score must outweighs the cost of the title loan.
Another time where this can have a benefit is prior to a large purchase where an increased credit score will allow you to get a lower interest rate on a large purchase. This should be easy enough to calculate. If the money you can save on a 30 year mortgage is significantly more than the cost of the title loan, then it may make sense.
You can get an estimate of title loan costs using our calculator. Fast Title Lenders offers one of the lowest interest rates in the industry. Even with the best title loans, they are more expensive than other forms of credit so it is important to weigh the costs carefully.
How much can the Credit Score Increase?
The credit score increase will vary per individual. Let’s look at another example. If you have $10,000.00 of available credit and your outstanding balance is $6,000.00, then your credit utilization is 60%.
This 60% utilization has a negative effect on your credit score. To increase your credit score, you would need to get this percentage under 30%.
Getting a $3,000.00 title loan and paying down the outstanding balance will accomplish this. Depending on your score and other factors affecting your credit, the increase can be significant.
To find out how much different amounts will affect your credit score you can use a credit score simulator. These are provided by many of the credit monitoring companies including Credit Karma.
You can plug in different amounts to see the amount of the increase to help decide if it makes sense for your particular situation.
Benefits of using a Title Loan to increase your Credit Score
The main benefit from using a title loan to increase your credit score is the ability to get a reduced interest rate on a loan for a large purchase. This can include a home or other property.
Depending on the amount you can increase your score, the size of the purchase, and the difference in interest rate, it may be worth a significant amount of money.
The other reason to use a title loan to increase your credit score is prior to a background check where your credit will be checked. This could be for a new job or other situation where a credit check is required.
Summary
Most car title loans do not require a hard inquiry and many title lenders do not report the loan to credit bureaus. You can use this to your advantage if you need to quickly lower your outstanding credit card debt to increase your credit score.
This is usually done prior to a large purchase, job application that requires a credit check, or other event where the benefit of a higher credit score outweighs the cost of a title loan.