You’re all set! You’ve picked out the color, make and model of your new car and can’t wait to purchase it. But before you get ahead of yourself, know if your credit record is able to handle a car loan. Take a look at these guidelines and if your credit falls short, here is a checklist on what to do.
Is Your Credit Solid Enough?
Do you know how to secure your credit report and most importantly what does all the information mean? Here is a helpful guide to determine if your credit is solid enough for a car loan.
1. Pull a current credit report: Before you walk into a dealership, know what is contained on your credit report. You need to pull reports from three credit reporting agencies: Transunion, Experian and Equifax. The fee is usually $10 for each and once a year you’re entitled to pull a free report from all three agencies. What’s on your report? Are there any mistakes? Any discrepancies could influence your credit worthiness.
2. What do car lenders/dealerships consider when you apply a car loan? Lenders look at the overall picture of your financial health. How much do you make? What is in your savings account? How much debt are you carrying? Is your monthly paycheck enough to afford a car? And yes, lenders will consider your credit report as well. This shows your past payment history, the history of your credit, any missed payments, any outstanding debt, the types of credit you have and how much new credit you’ve applied for in recent months.
3. What credit score is ideal for a new car loan? For a new car loan, the ideal score should fall between 690 to 719. A score which falls within this range or exceeds 719 means you potentially will secure a loan over a period of time with an interest rate lower than 5 percent.
What if Your Credit Falls Short?
There are instances when your credit falls short, but this doesn’t mean you won’t be able to purchase a car. Here are some immediate things to do to help improve your credit.
1. Recheck your credit report: Mistakes happen. The agencies might put information belonging to another person on your credit report. Sometimes your parent’s information might appear on your report. Evaluate if there are any discrepancies and address these mistakes as soon as possible.
2. Secure a loan from another lender: You desperately want a new car, but perhaps the dealership isn’t willing to lend the money to you. Shop around and determine if another lender will offer you credit despite your shaky numbers. Consider your bank or credit union as another place to look. They may be willing to offer you loan because of a long-term financial relationship.
3. Reassess your car choice: A larger, luxury car might not be in your future just yet. Know what you qualify for, despite your bad credit and also consider aiming for a lower priced vehicle to negotiate favorable terms for your loan.
How to Rebuild Your Credit
Once you know your credit is on shaky ground, it is wise to do whatever it takes to pave the road to recovery.
1. Monitor your credit: Maybe you’ve been a victim of identity theft or fraud and these unfortunate incidents damaged your credit. Be proactive and invest in LifeLock, a company equipped to monitor your credit and keep it safe. This wise choice will prevent serious hassles in the long term.
2. Pay down any credit cards near the limit: If it appears you’ve maxed out on your credit, this lowers your score. Try to pay off these credit cards first or at least put them below the maximum.
3. Limit your credit inquiries: With every hard inquiry on your credit, there is the potential to lower your credit score. Try to limit these inquiries to only a one or two times every few years. Several inquiries will decrease your credit score.
4. Close out old accounts you don’t use: If you aren’t using certain accounts, no need for them to appear on your credit report. One word of warning, don’t close out accounts where you have a long history and record of paying off debt on time. These will help your score.
Your credit is important, especially when buying a new car. Not all is lost if you aren’t there yet. Take proactive measures to eventually slip into your new ride!