Stefani Balinsky, Loans Canada

Buying a used car is financially responsible for many reasons. First, unlike the purchase of a new car, used cars don't hold the same level of depreciation. A new car dramatically decreases in value the second it is driven off the lot. However, with a used car, someone else has already taken on that early depreciation. Second, a car (used or new) can help build your financial security in two ways: it can be used as collateral, and, if you are financing it, your payments can build your credit history.

Credit history is a concept that can be nebulous for many. What is it, how do you manage it, and why does it matter? Read on to find out.

First, what is a credit score?

A credit score is a 3-digit number between 300 and 900. To a lender, your credit score represents the likelihood that you’ll make your debt payments on time. Borrowed money is a loan of any type including a credit card (revolving, unsecured debt), a mortgage, a car loan or other. 

In Canada, there are two official credit bureaus that determine your credit score. One is Equifax, while the other is TransUnion. Each one of the bureaus calculates your score differently. That is why you have more than one credit score. 

If you don’t know your credit score, you can get it free from Compare Hub. At the same time, you can see your credit report. Once you know your score, you understand if you need to protect it or improve it.

How do you build a credit score?

You build a credit score by using credit products. It sounds counterintuitive to need to take on debt to prove your financial responsibility. Shouldn’t you be debt free and all will be wonderful? Not really.

First, very few people are born with or earn enough money to pay for all their needs in one cash payment. That leaves the majority of the population financing their housing and transportation, while simultaneously paying for everyday needs like clothing, food, and education.

If you want to borrow money at the very lowest rate and with the most flexible terms skewed in your favour, having a strong credit score can help. Take out a credit card early in your life, pay for things with it, and pay off your balance on time and in full.

That’s right, a credit score is a product of time and healthy credit habits. 

Your car and your credit score 

Used cars require maintenance and repair for wear and tear. The lump sum payment on a serious car repair can deplete your savings. And if you need to borrow the money, you need to go through the application process and qualify.

That is the beauty of warranties. They pay the cost of repair when the damaged part is under warranty. 

Insurance, on the other hand, pays when the damage is the result of an accident. We can imagine the impact of not having insurance on your bank account. In fact, provincial governments like Quebec and Ontario require drivers to carry insurance. 

Final thoughts

A lot of Canadians rely on loans and credit cards to build their credit scores, and some pay their bills in full and on time. 

Loan terms and insurance rates fluctuate according to your credit score. When you buy a car, whether used or new, how you finance it throughout its lifetime, can affect your credit score. This includes keeping it running well.

Preventing any costly repair is not always possible. Accidents and malfunctions are out of your control. However, planning how to protect your finances is something that you can do with a used car warranty and by protecting and growing your credit score.