Car Buying & Credit Scores: What To Know
According to the results of a recent survey conducted by BuyingAdvice.com, only 56 percent of online car buyers know their credit score.
Still fewer, 39 percent, have requested a credit report within the last three months. And, only 35 percent have requested a credit report from more than one bureau.
Though lenders will typically look at other factors, such as length of time with an employer and length of time at an address, a buyer's credit score, sometimes referred to as a bureau or FICO score, is always a major component in assessing which loan rate a buyer can qualify for. For that reason, a buyer's credit score directly impacts the size of the monthly payment that he or she will end up with.
For a car buyer with a 60 month $20,000 loan, the difference between a high and low score can be as high as $70 a month, or $4000 over the lifetime of the loan. These estimates are issued from Fair Isaac Corporation, the company that developed the most commonly used software for determining the score, giving rise to the term FICO score.
Forty-five percent of those surveyed said they had taken steps to improve their credit score prior to applying for a car loan. The sample of 1253 online car buyers was taken among the thousands of users who request an online price quote from BuyingAdvice.com each month. Each participant identified themselves as being within 30 days of making a new car purchase.
Every American who has received credit will likely have a report with the three main bureaus, Equifax, TransUnion and Experian. Each bureau maintains records on amount of credit extended and payment history. This is then used by potential lenders to determine the risk associated with extending credit to an individual.
There can be variations between the scores with each bureau depending on their individual criteria and the data reported to them. This is one reason experts suggest pulling reports from all the bureaus prior to a major purchase.
The score reflects a variety of components. About 35 percent of the score is determined by payment history, another 30 percent by amount owed, 15 percent by the length of the credit history, 10 percent by the type of credit on the report and another 10 percent by the amount of new credit on the report.
The most important reason for pulling a credit report prior to negotiating a loan is to find, and challenge any errors on a report. The bureaus are only as good as the information they receive and mistakes do happen. It is comforting to know that all of the agencies have a system for correcting errors that are brought to their attention. Unfortunately, the correction process can be time consuming and that is another reason to pull a credit report well in advance of a major purchase such as a car.
Also by pulling a credit report, you will be able to get some sense of where you stand and take steps to improve your overall score.
Clearly, the best way to achieve a good credit score is to pay your bills on time consistently. However, it is also important to bring all your accounts up-to-date before applying for new credit.
Typically there is a lag between your payment reaching your account and the lender reporting it to the bureau. So, allow time for the report of your current status to reach the bureau. But according to experts, it may not be advantageous to pay your balances off entirely, as you may be penalized for having increased available credit.
A balance of about 30 percent on a small number of loans paid regularly is optimal according to most authorities. The type and length of accounts is another key factor, a mortgage or car loan will carry more weight more than a revolving loan, such as a store or credit card, in most cases.
The length of each account history and of the credit file is also a factor. Opening new accounts will typically lower the average person's credit score.
There is some confusion about how credit inquires impact score. Typically the bureaus attempt to differentiate between similar inquiries within a short period of time which is seen as shopping for a competitive rate, as opposed to a variety of unrelated inquiries. So when car shopping, it is advisable to make loan applications as close together as possible. Requesting a credit report from a bureau will not impact your credit score.
Know that when it comes time to negotiate your loan, the person across the desk from you will have all this information in front of them. So, make sure that what they are basing their decision on is accurate and that you have it too. As with so much in the car buying process, a little homework goes a long way.
Published on Tuesday, December 18, 2007 - Email to a friend
Copyright 2008 BuyingAdvice.com, INC. All rights reserved. This material may not be published, rewritten, or redistributed.
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