How to Build Your Credit Before First Auto Loan

Dear Let's Talk Credit,

I'm having a really hard time with an auto loan and I'm not sure why. I am young, 22 years old and have had a credit card since I was 18 years old. Always paid on time, never missed a payment and 12 months ago I opened a department store credit card, which I also take great care of. Then I opened another retailer card about four months ago, and again I am in great standing.

My credit score is 670 and I am fully employed making about $50,000 a year with less than $300 in debt and can't get an auto loan. I don't know what to do. My rent is virtually nothing, $215 a month, and I own a 2011 car and my tuition is all paid. Please help me find out what to do!

- Kelly

Dear Kelly,

A FICO credit score of 670 puts you in the mid-range for what you could expect to pay in interest for a car loan. MyFico.com says the national average auto loan rate for someone with a FICO score in the 660-689 range is 6.8%. That's based on a 36-month car loan of $10,000.

Lenders may be hesitant to offer you a car loan because you haven't shown a previous history of paying an installment loan on time and as agreed. Credit cards have more payment flexibility than an installment loan. You have the option to pay off all the charges each month or let them revolve to the next month, only paying the minimum amount due. However, with a car loan, you must pay the same amount each month for 36 to 60 months.

Don't give up, though. A lender may be more willing to take a chance on you if you provide a down payment of 20 to 25% of the purchase price of the vehicle. You will also be in better financial shape with a substantial down payment on a car loan. Because cars tend to depreciate quickly, the less money you borrow for a car, the less likely it is that you will be upside down in the loan.

Shop around for the best interest rates. Don't rely on dealer financing. Be sure to check local credit unions and community banks to find the lowest rate.

Lastly, you might consider purchasing a smaller item that you need, such as furniture or an appliance, and financing it through a short-term installment loan. This could be viewed favorably on your credit history, thereby increasing your chances to qualify for your auto loan. You'll create a better credit mix by showing you can handle installment loans, and credit mix makes up 10% of your FICO score.

Let's keep talking!