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Financing a car can help you build credit, as long as you manage the loan responsibly and the loan’s activity is reported to one of the major credit bureaus.

Like with most other debt obligations, responsibly making on-time payments can help your credit score. However, making late or missed payments can hurt your credit score, as can the hard pull of your credit report that potential lenders conduct when you apply for an auto loan.

How Does Car Financing Work?

While it is possible to pay for a new car with cash, it’s common for many potential auto buyers to use car financing. You may get a car loan for the full purchase price, or make a down payment and get a loan for the rest of the amount.

The lengths of car loans vary but are commonly between 24 and 96 months, with six years (72 months) being the average. After making your payments for the balance of the loan, the loan is paid off and you take full ownership of the car.

Note that your car acts as collateral for an auto loan. This means that if you fail to repay the amount borrowed, the lender can take your car to recoup its losses.

Recommended: When Are Credit Card Payments Due?

How Financing a Car Can Affect Credit Positively

Most car loans are reported to the major credit bureaus, and your payment history and balance is usually included on your credit report. Making on-time payments on your car loan can have a positive impact on your credit. Potential lenders want to see a history of reliably paying your debts, and making payments on a car loan can help with establishing that.

Another factor that makes up your credit score is having a healthy mix of different types of credit. This can be another reason why having an active auto loan can help build credit, as it adds to the types of credit you have.

How Financing a Car Can Affect Credit Negatively

Just as making on-time payments on your car loan can have a positive impact on your credit score, missed or late payments can affect your credit negatively.

Additionally, when you initially apply for an auto loan, the lender will conduct a hard pull on your credit report to verify your creditworthiness. This can drop your credit score by a few points, though those drops usually only last a few months. If you’re working with multiple lenders, keep in mind that hard credit pulls by multiple lenders in a short period of time will usually get combined so it appears as a single inquiry.

And while paying down debt is often a good idea, paying off a car loan affects your credit in some additional ways. If you don’t have other debts or loans, it’s possible that paying off your loan can have a negative impact on your credit score. This is because your on-time payments no longer get reported, and you’ll have one fewer type of credit to your mix. Additionally, if you took out your car loan a while ago, paying it off can impact the average age of your open accounts, which also influences credit.

Factors That Influence Your Credit Score

The biggest factor that influences your credit score is your payment history. Potential lenders want to see that you reliably pay your debts, and making on-time payments is one way to show that. Other factors that influence your credit score are:

•   Your average age of accounts

•   Credit mix

•   How much you owe

•   How many recent inquiries appear on your credit report

Tips to Build Your Credit Score

Here are some tips to consider that can help build credit:

•   Make sure that you always pay your bills on time.

•   As you apply for new debt or credit, only apply for loans that you know you have the financial ability and discipline to pay.

•   Aim to keep your credit utilization — the amount of your total credit you’re using — at 30% or lower. Having a higher credit utilization rate can negatively affect credit.

•   Remember to check your credit report at least once a year. Not only can this help you to monitor your credit health and understand the impacts of various activities on your credit, it can help you spot any errors or fraudulent activity.

Recommended: Credit Score Needed to Buy a Car

Mistakes to Avoid When Financing a Car

One of the biggest mistakes that you can make when financing a car is applying for a higher loan amount than you can afford. When you take out a car loan, you’re making a multi-year commitment to make those monthly payments. If you take out a loan for more money than you can reasonably afford, you run the risk of destabilizing your overall financial situation and ending up in a situation where you make late payments or, even worse, miss payments.

Recommended: Average Payment for a Car

Is a Car Loan a Wise Option to Build Credit?

A car loan can be a good option to help build your credit. Remember, what potential lenders are looking for when they look at your credit report is a history of meeting your debt repayment obligations. A car loan that you regularly pay on time can be a great way of showing that you are reliable.

Also follow additional tips for getting a car loan to help give you a head start toward building your credit.

Other Ways to Build Credit

Aside from turning to car financing to build credit, here are a few other ways to build credit that you might consider.

Become an Authorized User

Another way that you can build credit is by becoming an authorized user on someone else’s credit card account. When you are an authorized user on a credit card account, you’re not financially responsible for paying the statement, but it still shows up on your credit report. Keep in mind that how the primary account holder manages their account can affect your credit score, either positively or negatively.

Recommended: Breaking Down the Different Types of Credit Cards

Consider a Personal Loan

Another option to build credit is by taking out a personal loan. Unlike a car loan, which is considered a secured loan since the car itself acts as collateral for the lender, a personal loan is an unsecured loan. That means that there is no collateral for the lender to seize if you stop making payments.

In certain situations, this can make a personal loan a great option for building credit. In fact, if an auto loan isn’t the right option, you can consider getting a personal loan for a car.

Apply for a Credit Card

Responsibly using a credit card and paying it off in full each month is another way that you can establish credit. Your credit card balance and payment history are typically reported to the major credit bureaus.

Additionally, some credit cards offer rewards, such as cash-back rewards, with each purchase. Those rewards can be a boost to your monthly budget.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?l

The Takeaway

If you take out an auto loan to buy a new or used car, it will typically get reported to the major credit bureaus. That means making on-time payments on your auto loan can help you build credit. Similarly, late or missed payments can have a negative impact on your credit score.

Applying for a credit card and making regular payments can be another way to build your credit.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Does paying off a car loan help build credit?

While making regular payments on your car loan helps you build credit, paying off your car loan doesn’t always have the same impact. When you pay off your car loan, you no longer have the monthly payment history showing up on your credit report. Still, paying off a car loan can be a good financial move since it helps lower the total amount of your debt.

How can I keep my payment within my budget when financing a car?

The monthly payment amount of your car loan will depend on a variety of factors — the total purchase price of the car, your down payment, the length of the car loan and your interest rate. If you want to keep your monthly payment below the average payment for a car, you can get a cheaper car, make a higher down payment, or take out a longer loan. You can also work on building your credit score to hopefully qualify for a lower interest rate.

How fast can a car loan raise my credit score?

While taking out a car loan can possibly build your credit, you shouldn’t count on an immediate positive impact. In the short-term, it’s possible that your credit score may decrease from the new credit inquiries and the additional debt that shows up on your credit report. However, over time, making regular and on-time payments on your auto loan could build your credit score.

Does leasing a car build credit?

Most lease payments are reported to the major credit bureaus. That means that regular, on-time payments can help you build your credit in a similar manner to buying a car with a car loan. However, if you make late payments or miss payments on your lease, it can have a negative impact on your credit score.

Photo credit: iStock/Zorica Nastasic

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

SOCC-Q424-009

For many people, clothing is a favorite purchase, and shopping for new looks is practically a hobby. Fashion is a way to express your personal style; a new pair of jeans or boots can be a major mood-lifter.

But let’s face it, clothes can be expensive. If fashion is your weakness, it can take a big bite out of your budget. According to the Bureau of Labor Statistics, the average American household spends $1,945 a year on apparel and related services. But some people spend considerably more, ringing up bigger bills by buying the latest designer clothes, shoes, and accessories. These purchases can add up over time, leading to credit card debt and making it difficult to get ahead and achieve your goals. Here’s a look at some ways to reduce the amount you spend on clothing without giving up your love of fashion.

Money-Saving Tips for Buying Clothes

There are ways you can cut down on your clothing expenses but still score some pieces you can’t wait to wear. Here’s 15 suggestions on how you can save money on clothes without feeling deprived or out of sync with the latest styles.

💡 Quick Tip: Tired of paying pointless bank fees? When you open a bank account online you often avoid excess charges.

1. Shop the End-of-Season Sales

Ever notice how spring and summer clothing seems to go on sale in June or July? Or fall and winter clothes in January? The reason is because stores need to sell that merchandise so they can make room for next season’s items. Time it right, and you can scoop up current seasonal clothing at steep discounts. Just don’t go shopping the second that next season’s looks hit the racks.

2. Host a Clothing Swap

You know the saying, someone else’s trash might be your treasure. A cost-free way to get some new pieces is by arranging a clothing swap. The ground rules: Everyone brings clean, gently used clothes they’re looking to unload, and attendees get to sift through other’s clothing and add to their wardrobe for free.

A clothing swap is a great way to combine socializing and “shopping.” If you want to host one, heed this advice:

•   Make sure you’ve got a big enough space where everyone can comfortably peruse and try on items.

•   Invite people who are roughly the same clothing size.

•   Set a minimum number of pieces they need to bring.

•   Don’t feel like being the coordinator? Check out Meetup.com and Eventbrite.com to find swaps near you.

3. Ask for a Discount on Damaged Clothing

A handy tip for how to save money when shopping for clothes: If you find something you love but notice slight imperfections such as a small tear, loose thread, or a flaw in the fabric, bring it to the attention of a store employee. You might be able to get some dollars knocked off the retail price. If the salesperson doesn’t offer this, you can politely ask if the price can be lowered to reflect the garment’s condition.

Think it’s not worth the trouble? Remember why saving money is important. Every little bit of extra cash you sock away can be used to pay down debts or go towards a goal like funding a summer vacation.

4. Look for Coupon or Promo Codes

Before making a purchase, do an online search to see if the retailer offers a store coupon or promo code you can use when shopping online. You can find available coupon or discount codes at sites such as Retailmenot.com, Rakuten.com and BeFrugal.com, which all offer cash back for purchases made. Many times, if you are a first-time customer, you can snag a discount and/or free shipping by signing up for emails or text messages.

5. Mend Your Clothes

Are there things hanging in your closet you’re not wearing simply because a button is missing or the garment has a small hole? Instead of taking it to a tailor, buying something new, or avoiding it altogether because it needs repair, try fixing it on your own. Basic mending doesn’t require a lot of tools and is pretty easy.

As long as you’ve got the basics such as a needle, thread, scissors, or buttons (if needed), you’re good to go. If you’re not sure about your hand sewing skills, you can find a slew of how-to videos on YouTube.

5. Buy Generic Brands for the Basics

When it comes to certain articles of clothing, purchasing a generic brand over a name or designer one can save you money without jeopardizing your style. Any item you wear under something, like a tank top or a tee shirt, doesn’t need a fancy label to serve the purpose. Why buy a white tee at a high-priced store for $50 or $90 when a similar one at a national chain retailer costs only $5?

6. Create a Capsule Wardrobe

Having a capsule wardrobe means you’ve created a streamlined clothing collection that features well-made, non-trendy pieces that can all be mixed and matched. The idea is to spend a little more on the items initially. In the long run, however, you save money because these higher quality garments will last longer and not have to be replaced every few months.

A capsule wardrobe also offers timeless, versatile clothing choices instead of a closet full of flash-in-the-pan styles. Not having a large wardrobe can also help reduce the stress of getting ready every day.

7. Wash Your Clothes Properly

Laundry mistakes can damage your clothes. For instance, washing certain fabrics in hot water can cause shrinkage, fading, and wrinkling, as well as cause dye to run. However, using cold water is generally more clothing-friendly, reducing the risk that you will ruin a garment in the wash. You can also save on your gas or electric bill, since around 90% of all of the energy used in your washer goes to heating up the water.

Another way to extend the life of your clothes is by not washing every single item after one wear, with the exception of course, of underwear and socks. Why? Each time you wash your clothes, you’re putting stress on the fabric. By wearing your clothes a few times before washing, you can minimize any damage. As an added bonus, you’ll also spend less on laundry detergent.

💡 Quick Tip: Want a simple way to save more everyday? When you turn on Roundups, all of your debit card purchases are automatically rounded up to the next dollar and deposited into your online savings account.

8. Borrow from a Friend

Going to a gala event or attending a wedding but have nothing to wear? Consider asking that generous, stylish friend if you might be able to borrow from their closet. This can spare your bank account and allow you to get dressed up in something new and fresh to you. The only cost you might incur is taking the garment to the dry cleaners after.

Don’t have a friend with a fab wardrobe? Consider renting an outfit for your big night out.

9. Figure Out Cost Per Wear

To ensure you get your money’s worth out of the clothing you buy, pay attention to how often things get worn. If a piece is costly and you’ve only worn it once, you’re not reaping its full value.

You can figure out if your money was well spent by calculating the cost-per-wear ratio. Just divide the item’s cost by how many times you wear it. For example, if you buy a coat for $100 and wear it 100 times, your cost per wear is $1. On the flip side, if you’ve only worn it five times, each wear is equivalent to $20 which probably hasn’t given you the most bang for your buck. Before you buy the clothing, take time to do the math to assess how many times you realistically expect to wear it.

10. Upcycle Your Clothes

Upcycling clothing is taking something old, recycling it, and making it into something new to wear. Repurposing clothing is one of the many creative ways you can save money.

Upcycling clothes can include sewing, cutting, dyeing, or even updating a cardigan with new buttons. Fun examples of upcycling include hand-painting a jean jacket, cutting a pair of jeans into shorts, creating a tote bag from a sweatshirt, or transforming a wool blanket into an autumn coat or cape.

Upcycling is also eco-friendly. According to the Council for Textile Recycling, the average American throws away 70 pounds of clothing and other textiles every year. Not only does upcycling help you buy less and keep excess fabric out of landfills, it’s a way to save money and live sustainably.

11. Retool Your Clothing Budget

One way to stop overspending on clothing is to figure out how much you’re actually shelling out each month and then set a limit. There are several different budgeting techniques, such as the 50-30-20 rule. This divides your take home money into three categories: needs (50%), wants (30%) and savings and debt repayment (20%).

The needs category encompasses expenses you can’t avoid like groceries, housing, and utilities. Generally, clothes fall into the discretionary wants group along with entertainment, dining out, and monthly subscription expenses. Some financial experts suggest limiting clothing spending to 2 to 2.5% of your take-home pay which equals between 6% and 8% of the 30% wants category. If you make $4,000 a month after taxes, 30% of that amount equals $1,200: 6% to 8% of that figure equals an allotment of $72 to $96 a month for apparel. If that doesn’t sound like enough, you’ll want to see what other non-essentials in the wants category you can scale back.

Recommended: 50/30/20 Budget Calculator

12. Go Shopping in Your Own Closet

Do you really know what’s in your closet or tucked into all your dresser drawers? Go through your entire wardrobe, and you might find things you forgot you had or thought you got rid of years ago. Unearthing items you haven’t seen or worn in awhile can spark creativity with clothing combinations and stretch your wardrobe.

On the other hand, you may realize some pieces lingering in the corners of your closet hold no interest. If that’s the case, keep reading for details on how you might get some money for them.

13. Buy and Sell Used Clothing

There’s no question you can save money by shopping for second-hand clothing. You can find bargains at a variety of places, including thrift stores; consignment shops; garage, yard, or stoop sales; and even for free through community groups such as Buy Nothing. Two sites, among others, where you can sell your old stuff are Poshmark and Depop. There are also vintage and used clothing shops that buy clothing from people like you. Check out Buffalo Exchange and Crossroads Trading; you might get cash for your gear or be able to swap it for pieces you love.

14. Try a No-Spend Challenge

One way to curb clothes spending is to put a temporary kibosh on shopping for these items. For example, you might commit to a 30-day no-spending challenge on shopping for anything to wear. During the challenge, try not to put yourself in situations where you may feel the urge to shop; instead, explore alternative activities (like taking a walk with a friend, doing a hobby, or reading) to stay busy. At the end of the 30 days, you may notice you have more money, less credit card debt, and really don’t miss the items you didn’t buy. This can encourage you to spend less on clothing moving forward.

Recommended: Questions You Should Ask Before Making an Impulse Buy

15. Learn When Retailers Have Their Biggest Sales

You can save significant money on clothing by timing your purchases right. Start paying attention and you’ll see a pattern as to when major retailers host their big sales. Holiday weekends such as Martin Luther King Jr.’ Day, Memorial Day, Labor Day, and the Fourth of July are popular times for stores to feature great buys along with Black Friday. For online shopping, check out deals on Cyber Monday (the Monday right after Thanksgiving) and Amazon Prime Day.

You can also ask a salesperson at your favorite stores to give you the inside scoop on when certain items might be going on sale.

The Takeaway

Clothes shopping can be a fun and creative outlet, but if you’re not mindful, it’s easy to rack up the bills and possibly find yourself mired in unnecessary debt. By shopping with more intention, looking for the best deals, and making the pieces you have last longer, however, you can still feel good about what you wear without spending as much.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How can I stop spending money on clothes?

One of the best ways to save money on buying clothes is to simply remove the temptation, especially if you’re prone to impulse spending. If you like to shop online, unsubscribe from retailer emails so you won’t be alerted to new items and sales. Feel the itch while scrolling your phone? Put it down; pick up a book, or watch a movie instead. When you’re out and about, resist going into your favorite stores. Vow to commit to a 30-day shopping sabbatical and see how much money you’re able to save as a result.

Are there ways I can take better care of my clothing so they’ll last longer?

Yes, you can make your clothes last longer by following the washing instructions carefully, letting items air-dry when possible (instead of exposing them to a hot dryer), and storing them in a cool, clean, and dry environment out of the sunlight (which can cause fading). It’s also a good idea to fold heavy sweaters instead of hanging them to prevent the fabric from stretching.

Should I only buy cheaper clothes?

Not necessarily. Sometimes spending more means you’ll get a well-made, high-quality garment that will last for years. This can end up costing less than buying cheaper clothes that you only wear for one season. You might look for these pieces on sale at major department stores and at discount retailers.

Photo credit: iStock/Phiwath Jittamas

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