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Do mortgages and auto loans affect our credit scores the same way as credit card debts? I think they should have less negative impact since they are collateralized by the house or the car. If I’m right, that means if I get the same interest rate for an auto loan as for borrowing from a credit card when buying a car, I should go for an auto loan, right? Are there other things I should factor in to decide from which I borrow? Thank you for your help!

1 Thought on How different debts affect credit scores?
  1. Reply
    July 11, 2011 at 3:13 am

    You are correct. Credit scoring models give various types of weight to certain debt types. For instance having an American Express Credit Card with a $ 2,500 limit and a $ 500 balance would be better than a XYZ Merchant Store Card with a $ 2,500 limit and a $ 500 balance. As such an auto loan is an installment, which is a loan for a fixed period of time. Credit cards offer revolving terms and are needed to increase your credit score. While an auto loan can help build credit, it’s done over time, because most people will have a high balance to limit ratio on their auto loan. This of course, starts to change beyond year 3 on a 4 year term. Your credit report will show that your $ 25,000 auto loan is now down to $ 6,500. For the example that senario that you gave, it’s difficult to say which would be better. In some cases your credit card rate could be 9.5% and your auto financing rate could be 10.99% or your credit card rate could be 18.99% and your auto financing rate could be 11.75%. It’s best to compare your best auto rate against auto rates. Your best credit card rate against credit cards and so on. The clear winner would be if you had enough equity in your home to refinance, that you could pay off credit cards, auto loan and take out a few thousand at 5% interest over 30 years while deducting the interest expense as well. In all cases it depends. Get your best auto deal and analyse it against your true cost of using other funds. Get more credit score info and tips from check out credit score tips and faq’s. Also, get tips from Good Luck.

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