Car Buying 101 – Understanding Your Credit Report
Car Buying 101
Ok, you know you need to do your research before you even think about heading to the dealership.
Right? If not, read my car buying article.
You’ve got the exact make and model you’re looking for. You’ve read online reviews, watched videos, and feel comfortable with your choice.
You also understand that when you go to finance your loan, whether it be through a dealership, bank, or another lending institution, the lender will want to view and assess your credit report before they agree to lend you money.
Many of us, however, don’t fully understand the subtleties of the information in our credit report, even though these may mean the difference between driving off in the vehicle we’ve had our eye on for a while, settling for a base model, or walking away empty-handed.
What’s the Difference Between a Credit Report and a Credit Score?
Every time you pay your rent or mortgage, the transaction is recorded in your credit report. The same is true when you pay your utilities, your cell phone bill, banks, and other financial institutions.
Your credit report contains all the gory details, such as when the account was opened and closed, how much money you borrowed, how much you currently owe on the account, how often your payments were late, and requests for your credit report from potential lenders. If you’ve had debt collections, bankruptcies, or court judgments they will also be recorded.
The 3 main databases that most lenders use today are Equifax, TransUnion, and Experian. These databases are huge, and contain all of your credit purchases and payment history.
Using the information in your credit report, the credit agencies can predict how likely you are to make your payments on time. They summarize this with a number called your credit score.
What does your credit score really mean?
You’ve probably heard of your FICO score. Even though there are other credit scores available, FICO is used by over 90% of lenders.
Your FICO score is somewhere between 300 and 850. If your credit score is on the higher end of that spectrum, lenders view you as someone with a high likelihood of repaying your loan per your agreement.
While the FICO people do not divulge all the factors that go into the creation of your credit score, we do know that they consider more than 30 such factors, and include categories such as credit history, total money owed, and how long you’ve had a credit history. Most of us know that owing a lot of money and making our payments late or missing them altogether negatively affects our credit score.
The type of credit also affects your credit score, especially so if you have a short credit history. A credit card with a $500 limit that you’ve had for 6 months will be viewed differently than making mortgage payments for six years, for example.
Too many new accounts and recent credit inquiries can indicate cash flow problems, and can also negatively affect your credit score. “Soft” credit inquiries, such as when you request your own credit report do not affect your score.
You must know what is on your credit report before you set foot in the dealership. Get your report from all of the credit reporting agencies: Equifax, Experian, and TransUnion.
Should you avoid visiting the dealership if you don’t like what you see on your credit report? Not necessarily. Why not?
Few things will improve your credit score as quickly as making regular payments on an auto loan. You might want to consider purchasing a lesser vehicle than you originally had your eye on, making regular payments on that vehicle, and then trading it for the vehicle you really want.
In most cases, making regular payments will increase your credit score by about 100 points for the first 9 months, and then a few points per month after that. That means about 2 years after your purchase, you can buy that dream car.
I would love to answer any questions you might have. Feel free to give me a call at 615-605-5701, or just leave a comment below. Looking forward to hearing from you!