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Credit Scores and Reports

Buying a car? You might want to look at your credit first

Before you hit the car lot in search of the perfect deal, make sure your credit can help you score good terms

Summary

End-of-year sales can provide the perfect opportunity to purchase that car you’ve been eyeing. But if you have poor credit, a lackluster auto loan could offset any savings you might receive through a seasonal sale.

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End-of-year car sales offer a great opportunity to buy a new car at a lower price. But before you hit the lot, make sure your credit score is strong enough to earn you desirable terms.

Sometimes that requires a little advanced planning. And depending on the current state of your credit, it could mean waiting several months to purchase a car. It’s a worthwhile cause, though, since a high interest rate could weaken or completely annul any potential savings you’d get through a seasonal sale.

“This isn’t something you do the week before you sign a contract,” says Kenneth Robinson, CFP, senior advisor with Practical Financial Planning.

See Related: How to buy a used car

1. Read your credit reports

The information on your credit history is what goes into formulating your credit score. Both your credit score and history are a big part of determining what rate you’ll get on that auto loan. So you want to make sure that information is correct.

If your history contains mistakes – like an account that isn’t yours, an on-time payment noted as late, or an account erroneously listed as having gone to collections – that could cost you in the form of a loan denial or a higher interest rate.

“Inaccuracies can weigh down your score,” says Bruce McClary, spokesman for the National Foundation for Credit Counseling. One payment marked as missed could have a significant impact on your credit, even if it’s inaccurate.

You can pull a free copy of your credit report from each of the three major bureaus (Equifax, Experian and TransUnion) annually at AnnualCreditReport.com.

See related: FICO’s 5 factors: the components of a credit score

2. File disputes immediately

In an age where everything is on computers, it should take milliseconds to correct errors on a credit report, right? Wrong.

While you can file a dispute in minutes, the resolution – and resulting correction on your credit report – doesn’t happen instantly. Credit report disputes can take months to resolve, says Joe Ridout, spokesman for Consumer Action.

File a dispute as soon as you find any errors on your credit report, and keep an eye on the dispute process. If possible, wait to purchase a car until the issue is resolved.

3. Get into the habit of checking your credit score

A lot of financial apps give you access to one of your credit scores. Banks, credit cards, credit bureaus, and financial education services are all putting score-checking services into their apps.

“You can check your score any time,” says Ronald Montoya, senior consumer advice editor for Edmunds.com. “It’s a lot easier now.”

Though this information likely won’t be as thorough as pulling your credit report, it’s a convenient way to check your score frequently and catch errors in almost real-time.

What you need to know: There are thousands of different scoring formulas. So the score you check won’t necessarily be the same one your lender uses. But it should be close enough to give you a general idea of how you’re doing.

See Related: New tools help take the guesswork out of improving credit scores

4. Pay off credit cards

“Paying down debt will be the single best way to improve your credit score,” says Ridout. “The lower the better. Zero is the goal.”

Carrying a balance on credit cards is not great for your credit score, especially if it’s enough to significantly raise your credit utilization, which counts for 30% of your score. Once you pay off your debt, try to keep your credit card spending below 30% of your overall credit line.

If you’re not in a position to pay off your debt, “taking on more debt in the form of a car loan is a terrible idea,” says Ridout.

Though you can’t always plan when you’ll need a new car, you can modify your behavior. So if you’ve been rolling balances, now’s the time to stop. Only spend money that you have on hand and pay off (or pay down) those credit card balances.

5. Pay all your bills on time, every time

Along with paying balances, the other pillar of good credit is paying those bills on time every month, says Matt DeLorenzo, senior managing editor at Kelley Blue Book.

In fact, your payment history is the single biggest factor of your credit score, making up 35% of your overall score. So as you’re gearing up to buy a car, make sure you don’t fall behind on any of your bills since late payments can stay on your credit for seven years.

See related: How quickly can my score recover from a late payment?

6. Don’t apply for new cards or loans

“You never ever want to go out on a borrowing spree before you apply for a car loan or a mortgage,” says McClary.

This doesn’t just mean you should avoid new traditional loans or credit. It also includes financing a phone or using a payment plan for home improvements, says Montoya.

Every time you apply for a loan or credit card, the lender performs a hard pull on your credit. Unlike soft pulls (used by credit monitoring services), hard pulls can lower your credit score – usually by around five points – and impact your score for up to a year. (They stay on your credit history for two years.)

Also, if you have a lot of available credit, sometimes that makes lenders nervous too, says McClary.

If possible, skip applying for new credit for at least six months before you apply for a car loan, he advises.

7. Don’t close accounts

With credit, “what you don’t do can be just as important as what you do,” says McClary.

In the don’t column: Closing card accounts right before taking on a large loan.

When lenders look at your credit, one of the major factors they analyze is how much credit you have compared to how much credit you’re using. It’s called the utilization ratio.

Lenders will look at the utilization ratios on all your credit cards individually and in total.

But when you start closing accounts, your amount of available credit goes down – which means your utilization ratio shoots up – sometimes dramatically.

“Shutting down a lot of accounts at one time will send your score into the basement,” says McClary.

Credit scoring formulas also look at the average age of your accounts. And in this case, older is better. So if you shut down some of your older accounts, suddenly the average age could be much younger. Best bet: If you can, don’t close any accounts in the months before you apply for a car loan.

See related: Credit utilization: How this key scoring factor works

8. Know your options

Every consumer is unique, which means every credit profile is slightly different. If you have challenges with your credit, look into additional ways you can boost your score. Here are some examples:

Add a credit statement. If you’ve had credit problems but have resolved (or are resolving) the issue, adding a consumer statement to your credit history can help you, says McClary. While not every lender will read it, those who do will have a better understanding of your situation and might be more willing to work with you.

Create a plan to tackle debt and let lenders know. If you have high balances, create a plan with your card issuer to tackle them and ask for “some kind of confirmation that you have a plan to bring the account current,” says McClary. That way you have something to show an auto lender if that account “becomes an issue” in getting a car loan.

Become an authorized user. If you have a relative who’s willing, they can make you an authorized user on a credit card. “If they have good credit and a perfect payment history, that can boost your credit score,” says Ridout.

It can take a few months to see a change, and it’s a risky strategy for the cardholder – who’s responsible for all charges. If you’re doing this to improve your credit, there’s no need for you to have a physical card, Ridout advises.

Consider alternative data. If you have little credit history, you can investigate the possibility of augmenting your credit with alternative data. One example of this is Experian Boost. You give the credit bureau access to your savings or checking account transactions. It gives you credit – literally – for recurring, on-time payments. And it only includes the positive information.

“The hurdle is you have to be comfortable providing that information,” says McClary.

It will only affect your Experian scores, which may or may not be the ones your auto lender uses.

Research before you buy. Some automakers offer special programs through their internal finance arms to assist buyers with less-than-perfect credit, says DeLorenzo. Additionally, some lenders are more receptive to using alternative data than others.

If you find a lender who will consider alternative data, you might be able to get better terms on an auto loan.

“If you do look at that credit report and you have a bigger mess to clean up, it may be worth postponing that car,” says McClary. With a little help from a nonprofit credit counselor and a little budgeting, he says, “it’s possible in 12 months or so you can be in a much better position to finance a vehicle.”

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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