The first step in getting an auto loan usually begins with your credit score. Bottom line? If you have a high credit score, getting a car loan with a low interest rate will be much easier than if you have a lower score. Typically, getting a loan shouldn’t be a problem so long as you have a steady income, established credit history and your credit score is good.
What goes into your credit report?
While the three main credit bureaus – Experian, TransUnion, and Equifax – use slightly different methods to determine credit scores, the two most important factors are your history of making on-time payments and whether or not you have been late or defaulted on any loan obligations. The more often you have been late, the more points that will be deducted from your score. If a lender had to write off a balance that you didn’t pay, you will have a negative mark on your credit which could last for years.
The next key factor is the amount you owe compared to the amount of credit you have available. For example, if you are using 90 percent of the credit you have available, it will hurt your credit score more than if you are using just 30 percent of your available credit. Also, if you are considering closing some of your credit cards, wait until you actually get your auto loan. Closing credit cards will reduce your availability of credit. That, in turn, will raise the percentage of available credit you are using.
While less significant, the age of the accounts you have open and the date when the last activity on each account occurred is also important. Lenders want to see stability. As a result, your credit score will decrease if there are many recent account openings. Credit reports also show the mix of credit types, with revolving accounts (such as credit cards) impacting your credit score differently than installment accounts, such as an auto payment.
Finally, remember that your credit score will reflect recent attempts to secure credit. Each time a potential lender asks for your credit score at your request, your score will drop slightly. So it’s best not to try to secure an auto loan on the heels of trying to secure loans for a major purchase, such as new furniture, a home improvement project, or a new house. It is worth noting, however, that all inquiries for the same kind of loan (such as an auto loan) over a short period (usually 15 days) are treated as one request. As a result, such inquiries won’t have a major impact on your credit score.
Suppose your credit report contains errors
Because your credit report plays such an important role in getting an auto loan at a favorable interest rate, it’s a good idea to get copies of your report well before you start car shopping. Take the time to go over your report in detail to identify any errors or negative information. If you do find errors, they typically won’t be corrected overnight. You’ll need to alert the credit bureau of any mistake and be prepared to back up your claim with any necessary paperwork. You may also need to make on-time payments on all of your accounts for several months in order to raise your score. Note that you are entitled by law to receive one free copy of your credit report from Experian, TransUnion, and Equifax each year. And while the law does not require them to provide your credit score, it is available free of charge on some websites and from numerous credit card companies.
How should I get started?
If you want to know more about your credit score and how it affects your auto loan, talk to the auto loan experts at Point Breeze Credit Union. They’ll be happy to answer your questions and help you to make decisions that not only will boost your credit score, but also help to improve your overall financial well-being.
For more financial tips, visit Point Breeze Credit Union’s blog page.