Will she be buying a house during this time? If so, the less she owes the better. Paying rent and utilities doesn't show up on a credit report, so doesn't really help. I would pay cash for the car if she has the money. If she is only working as a fill-in with no steady income to show, she might not can get a loan anyway w/o a co-signer.

I agree if she's buying a house she shouldn't do it. Inquiries can hurt the score and they stay on the report for 2 years, plus average age of credit will be lower and it would adversely affect her debt to income ratio to have a car loan.

If she's not going to be buying a house w/in the next two years, then I would say to borrow as long as she has the cash in the bank to pay off the loan in case she ends up w/o income coming in (i.e. don't do it unless she's 100 percent sure she can pay it back).

Types of credit used accounts for 10 percent of the score and a mix of credit is preferred, so having a paid off car loan is going to be a good thing.

I know when I borrowed more (took a car loan, and took on a mortgage) my score went up significantly. When I got out of college, I borrowed for a car to build credit (I kept the loan for 3 months then paid it off).

Maybe have her check her credit score (lots of free sites to do so, I use Credit Karma) and if her score is already high, then don't go to the trouble... if it isn't high b/c of too few accounts, then it is worth doing.

Edited to add: Credit Karma has a "simulator" so you can put in what you want to do (like open a new loan) and it will explain how doing so would affect your credit.

She has more than enough to pay off any amount borrowed and most likely will not be buying a house in the next year or two. They both need to get settled into jobs, get married, etc before I see that as a priority for them.

Beagles, the future benefit of having had a loan and paying it off is why we are considering this. She would pay it off within a short amount of time. Good point about checking her score to see if it would be worthwhile.

Cash vs credit cards or loans is always the way I lean. Because of this attitude I am mortgage and debt free at 45. I can not explain to my peers how freeing it is to be without any debt. It has meant at times having less than I wanted but now for the rest of my life I feel worry free and that is more enriching than any car, house or vacation I could only afford with debt.

i was able to get a mortgage in my twenties with having only on credit card paid in full monthly and a good job. She need not add a loan In order to get future credit.

With the low interest rates now, my recommendation would be to get the car loan and then pay it off as quickly as possible - which is your plan. It would help establish and raise her credit score and would leave her a cushion of her own money in the bank in case of an emergency.

I don't see any problem with seeing if she could get a small car loan from a credit union. They have great rates, and it would be a good way to establish credit.

Agree with Beagles. If she already has a good credit score, pay for it with cash if she can. Building credit is very important, though - but I think this is a good example of how they "get us coming and going". If you're responsible enough and are able to pay cash, you get no boost on your credit rating, probably because you're not contributing to the profits of a bank. Uffdah!

Cars only depreciate, so IMO, they are best bought with cash when possible.

Cash is king! (Almost) always.

Here's our current thoughts. Great idea to check credit score, peeps! She is in the upper 600's. Not bad but not great. BF has no credit in his name (no loans or cc's) We think we will have her get the smallest amount she can and pay off a big chunk quickly and the rest within a few months. This will pull her up to the low 700's, not a pad score for a 22 year old.

We have no debt and the girls were taught by example that you don't buy things that you don't have cash to pay for. This daughter is a shopper (if Mom is paying!) but extremely frugal with her money! My daughter's are in their 20's but I think financial responsibility is one area where we excelled in raising them. Car wreck daughter had $$ in the bank to buy a new car or much more of a used car than we are. She wasn't spending any more $$ than she needed to. She likes her $$ in the bank.

Thanks all for your input.

When I bought my first home.... not too long ago.... they wanted me to have (2+) current, open lines of credit to qualify for my loan. So, having a shortly-opened-previous-account (like this car loan,) was meaningless. However, having a credit card open (that I essentially never used,) checked the box. In addition, my understanding is that one factor that increases a credit score is the length of positive credit history. For me, that is the longest credit card I have had open. (I had a closed account previous to that, but that doesn't help that factor.) Although it's been about ten years, this is still considered not that long. So, I would suggest she open a fee-less credit card.... and not use it. That will start to give her credit history and eventually boost her credit score.

As for the car loan.... I would pay cash.

The only way I would take out a car loan is if 0% financing was offered and she had the amount of the loan already saved. Even with zero percent I would ensure that they weren't increasing the bottom line price to make up for lost interest.

For the benefit of her credit score, it is worth the hassle. I recommend financing, money is relatively inexpensive and ones credit score is based on previous experience.

$5k loan, 1 year, 3% interest. $425 monthly payment, total payments 5.1k. Cost of loan, $8 per month.

this avoids being car rich, cash poor.

If she doesn't need to establish credit and it sounds like she does not., I would not finance things if I didn't have to and especially I would not finance something thar depreciates.

Update--She just drove back to campus in her LIEN free car! The finance manager rubbed me the wrong way yesterday and did it again today. He got her a loan, 8k @ 7 something %. We were quoted no higher than 2.4% yesterday but that may have been with me as a cosigner.

Interesting thing was that her true credit score was 80 points higher than the Credit Karma score showed. Finance guy said the online sites are not very accurate.

So, based on a higher than expected credit score, higher than desired interest rate and amount, she went across the street to the bank and came back with a check and paid for her amount owed. I ponied up insurance $ and the amount we said we would put in and she drove off in her new to her car.

Your credit score is largely dependent upon the amount of credit you have vs. the amount you have used. If you have $20k of credit and are using $15k of it, you will have onLy a "fair" score no matter how stellar your payment history.

A good way to have a good credit score is to have a line of credit or credit card and simply not use it.

According to what I have read, credit utilization ratio makes up 30%, but there are other factors:

Payment history - 35%

Length of credit history - 15%

Different types of credit - mortgages, car loans, credit cards - 10%

Hard inquiries - 10%

Her Fico score has a huge impact on rates. With a score in the 600's she simply doesn't qualify for a low rate, to be honest, 7% is actually pretty good considering her current history. It's too bad she paid cash because she really needs to start reestablishing her credit as soon as possible. All the negative stuff will remain on her report for 10 years so the more good stuff she can get under her belt the better and having a car loan that gets paid off on time without any late payments is very important.

I'm out of the shadows again on this one. 600 is not that great considering sub prime lending can start at 650. But at her age, she is just building experience on her file. The FICO algorithm models for the likelihood of delinquency within 24 months, so the factors going into that calculation correspond with the model value.

The only way to improve credit score is to have credit activity. And installment credit is considered more favorable than revolving credit. Also impacting interest rates and loan approval is the ability to pay. Permanent employment is less risky than sub work, so you get a more risky loan for a higher rate. That only changes when you have a consigner who reduces the risk. My first solo car loan came with a 10% rate in the early 90's.

Living debt free is great. However few people can afford a home with cash, at least where I live. Establishing credit with 7% interest on a $5,000 auto loan makes a lot more sense when you decide to buy a home with a 30 year amortized loan at a less favorable rate based on your lower credit score.

Finally, there are several industry modifiers available with FICO, auto being one. So the version of your score the dealer pulls is different than the one you receive when you go online. And many lenders will have custom models that may, or may not, act as an overlay to FICO. They model for a number of factors including delinquency, bankruptcy and retention. FICO is to credit modeling as Kleenex is to tissue.

Although I know the deal is done, I thought this might add some clarification for others.....Just some additional information for consideration from experience.

She has no negative reports on her credit history she just doesn't have much credit history. As stated above, she's 22 and a December college grad. BF and her will get married most likely next summer. He graduates in May. We live in a low cost of living area. She still has enough $$ to put 20% down on a typical starter house in a nice subdivision. She commented that her cousin and her DH got a mortgage with no loan history and only one CC at 24 and that she would be in the same situation. In the long run, I'm not worried about these guys and their finances.

If you'd like to monitor her credit I recommend the site linked below from the Federal Trade Commission. No charge, no gimmicks, no spam. Consumers are allowed one free report annually from each of the three credit bureaus. To monitor it regularly you can order a report from Equifax for example, wait four months and order a report from TransUnion, wait four months and order from Experian, wait another four months and since a year has passed start again with Equifax and repeat the cycle. So each bureau's report will be a year apart and therefore free. Hopefully that makes sense, I've not had my coffee yet. ;) Here is the link: FTC.gov free credit reports

Sorry, I misread something, but as you can see by all the commentary, it's important for her to establish first. You can pay off early but it's key to become established.

Why are credit inquiries bad for your credit score?

"FICO's research shows that opening several credit accounts in a short
period of time represents greater credit risk. When the information on
your credit report indicates that you have been applying for multiple
new credit lines in a short period of time
your FICO Scores can be lower as a result."

@lynelle, the algorithm looks at the whole picture. So someone with a deep credit history in good standing can have an inquiry with no impact on your score. Someone new to credit, all revolving debt and/or high utilization can have a bigger impact from inquiries.

In general think back to what the model is predicting - likelihood of delinquency. So if you are shopping for credit and add new credit obligations, then there is a mathematically increased likelihood that you could be delinquent. It's math, so while one assumes the human quality of "I don't take on more debt than I can afford", statistically speaking there are more delinquencies under such circumstances. And so the model looks at characteristics on the credit file, weights them and cacalculates your score at that single point in time. Obviously that is an oversimplification, but it's an algorithm.