Are you wondering if a car loan can help you build credit in Australia? The answer is yes! A car loan can be an effective tool to improve your credit score, provided you handle it responsibly. In this guide, we’ll explore how car loans can impact your credit, tips for managing your car loan, and alternatives to consider, such as bad credit loans.

How Can a Car Loan Affect Your Credit in Australia?

When you take out a car loan, it can impact several aspects of your credit report, which in turn affect your credit score. Here’s a breakdown of how car loans can influence your credit:

Credit Mix

Your credit mix refers to the different types of credit you have, such as credit cards, mortgages, and installment loans like car loans. A diverse credit mix can positively impact your credit score, as it demonstrates your ability to manage various types of credit.

Repayment History

Your repayment history is the most significant factor in your credit score. Making on-time payments for your car loan can help build a positive repayment history, which will boost your credit score over time. On the flip side, late or missed payments can harm your credit score.

Credit Utilisation

While car loans don’t directly impact your credit utilisation (the ratio of your credit card balances to your credit limits), paying off a car loan can free up more of your monthly budget to pay down credit card balances, which can help lower your credit utilisation and improve your credit score.

Length of Credit History

When you take out a car loan, it adds a new account to your credit report, which can affect the average age of your credit accounts. This may temporarily lower your credit score, but as the loan ages and you make timely payments, it can contribute to a longer credit history and a higher credit score.

Tips for Managing Your Car Loan to Build Credit in Australia

To effectively use a car loan to build credit, it’s essential to manage the loan responsibly. Here are some tips to help you maximise the credit-building potential of your car loan:

Make On-Time Payments: Always pay your car loan on time, as late or missed payments can have a negative impact on your credit score.

Set Up Direct Debits: To ensure you never miss a payment, set up direct debits through your lender or bank. This will help you maintain a positive repayment history.

Pay More Than the Minimum: If you can afford to, consider paying more than the minimum payment each month. This can help you pay off the loan faster, save on interest, and demonstrate responsible credit management.

Monitor Your Credit: Regularly check your credit reports and scores to track your progress and ensure there are no errors or discrepancies.

Avoid Excessive Credit Inquiries: Applying for multiple loans or lines of credit in a short period, including bad credit loans, can result in multiple credit inquiries on your credit report, which can lower your credit score. Limit your applications to only what you need.

Alternatives to Consider

If you’re not ready to take on a car loan or want to explore other options for building credit, here are some alternatives you can consider:

Secured Credit Cards

Secured credit cards are designed for individuals who are looking to establish or rebuild their credit. They work by requiring a security deposit, typically ranging from a few hundred to a few thousand dollars, which serves as collateral for the credit line. This deposit is usually equal to the card’s credit limit, helping to minimise the risk for the issuer.

When using a secured credit card, it’s important to make on-time payments and maintain a low credit utilisation, ideally below 30%. By doing so, you can demonstrate responsible credit management and potentially improve your credit score over time. Many secured credit card issuers also offer the opportunity to upgrade to an unsecured credit card after a period of responsible use, which can further enhance your credit profile.

Bad Credit Loans

Bad credit loans cater to individuals with less-than-perfect credit scores, offering a second chance to demonstrate responsible credit management. These loans can come in various forms, including personal loans, secured loans, or payday loans. While bad credit loans can help rebuild your credit by making on-time payments, it’s crucial to be cautious of the potential drawbacks.

Interest rates and fees associated with bad credit loans tend to be higher than those of traditional loans, which can make them more expensive in the long run. Before applying for a bad credit loan, it’s essential to carefully assess your financial situation and ensure you can afford the repayments.

Credit Builder Loans

Credit builder loans are unique financial products offered by some banks and credit unions in Australia. They are designed to help individuals establish or improve their credit history by providing a small loan, usually ranging from $500 to $5,000, which is held in a savings account or term deposit.

The borrower makes monthly payments, including interest, over a predetermined period, typically 12 to 24 months. The lender reports these payments to the credit bureaus, helping to build a positive repayment history. Once the loan is fully repaid, the funds are released to the borrower, often in the form of a savings account or term deposit, making it an effective savings strategy as well.

Authorised User Status

Being added as an authorised user on a family member or close friend’s credit card account can be a valuable strategy for building credit. When you become an authorised user, the account’s positive repayment history and credit utilisation are reported on your credit report, which can help improve your credit score.

However, it’s essential to ensure that the primary cardholder maintains responsible credit habits, as any negative activity, such as late payments or high balances, will also impact your credit. Communication and trust between you and the primary cardholder are crucial to making this strategy work.

Rent Reporting Services

Rent reporting services in Australia allow tenants to report their monthly rent payments to the credit bureaus, turning a regular expense into an opportunity for credit improvement. By making on-time rent payments, you can build a positive repayment history and enhance your credit score.

Although these services may require a small fee, the potential credit-building benefits can make it a worthwhile investment for many renters. Just be sure to research and choose a reputable rent reporting service that works with the major credit bureaus in Australia.

Utility and Mobile Phone Payments

While utility and mobile phone payments typically don’t appear on your credit report, some companies in Australia may report your payment history to the credit bureaus. By making on-time payments for these accounts, you can contribute to a positive

repayment history and help build your credit. To take advantage of this option, check with your utility or mobile phone provider to see if they offer credit reporting.

In addition to on-time payments, maintaining a low balance on any accounts with a credit component, such as postpaid mobile phone plans, can also contribute to a better credit utilisation ratio, further improving your credit score.

Peer-to-Peer Loans

Peer-to-peer (P2P) lending platforms connect borrowers with individual investors willing to fund loans, offering an alternative to traditional bank loans. These platforms can be an excellent option for building credit in Australia, as they often have more flexible eligibility requirements and may be more willing to work with borrowers who have less-than-perfect credit.

By obtaining a P2P loan and making timely payments, you can demonstrate responsible credit management and potentially improve your credit score. Keep in mind, however, that not all P2P lending platforms report to credit bureaus, so it’s essential to check with the specific platform before applying. Additionally, interest rates on P2P loans can vary widely, so make sure to shop around and compare rates before making a decision.

By exploring these alternatives and maintaining responsible credit habits, you can build a strong credit profile in Australia without relying solely on a car loan. Remember, consistency and patience are key when it comes to credit building, so stay focused on your long-term financial goals and make a conscious effort to manage your credit responsibly. does not list all the lenders in the market. The lenders listed in this article are not representative of all the lenders available in the market. There may be other loan providers available that are not listed here. may have a commercial arrangement with lenders featured on this site. believes all information to be accurate on the date published.
This information is general and does not take into account your specific personal situation. For advice, seek a professional advisor. For debt problems and free advice about debts, contact the National Debt Helpline on 1800 007 007.