Vehicle Financing: The Impact of Your Credit Score
Before you apply for an auto loan, you should always check your credit score. This score should give a solid understanding of how you look as a borrower to your potential lender.
Who Actually Gets the Best Auto Loans?
There is a common misconception among consumers that few people can actually get approved for the best auto loans with the lowest interest rates; this is simply not the case.
Obtaining Your Annual Credit Report
When looking for your credit report, it is best to stick to the two big credit bureaus: Equifax, and TransUnion. These two credit bureaus are well-respected monitors of consumer credit information. They keep track of all your borrowing events over time and apply these events to a three-digit scale. This three-digit credit score provides a summarized representation of your creditworthiness as a potential borrower.
You are legally entitled to get one credit report for free from each of these credit bureaus every year. Just go to one of all of these sites, enter your information and download your report!
Other Ways to View Your Credit History
These days, there are countless promotions available so that you can get your credit history for free anytime. These promotions typically come from credit card companies, credit unions and banks.
For example, Discover Financial Services recently started a promotion that offers free FICO scores through the company’s “Credit Scorecard” program. This promotion also applies to non-customers of Discover. To get your score through this promotion, you will need to provide some personal data.
Reviewing Your Credit Report and Credit Score
Once you receive your credit report, take the time to review it thoroughly. Look for any errors that may appear and, if necessary, follow instructions for disputing these errors. These mistakes could be significantly affecting your credit score, so it is very important to correct them as quickly as possible.
While you do have the right to view your credit report each year without charge, your credit score is another matter. In most cases, you will be required to pay approximately $7 if you go through one of the main credit bureaus. If you use another service, you could pay $20 or more to get your score.
The credit bureaus track more than just your credit card and loan payment history. They also record your available credit, current total debt, the percentage of available credit you’re currently using and many other key factors.
You should also be aware that your credit history and credit score will differ between each credit bureau. Each bureau utilizes a different list of creditors for gathering credit information, and they also use different algorithms to calculate your actual credit score.
Credit Score Discrepancies
It’s important to understand that there is a lot of fluctuation between different agencies when it comes to credit scores. Depending on the agency, you could expect to get 60 or more different credit scores.
This means that the credit score you get will probably not be the exact score your auto lender will use to analyze your auto loan application. Each auto financing agency purchases credit scoring software from FICO or another provider and your lender has no obligation to provide the exact score they used during their analysis.
Putting You into a Category
Most vehicle financing firms divide credit scores into separate categories. For example some reporting Agencies utilize five categories: Super Prime, Prime, Nonprime, Subprime, and Deep Subprime. Agencies often divide their categories into different ranges. Even if both agencies show your credit score as 680, one might put you in the Prime category while the other places you in the Nonprime category.
It is also important to note that the size of your down payment will have a significant effect on which category you get placed in. This is especially true in the vehicle financing world.
The category a lender places you in will play a major role in your annual interest rates. In recent years, individuals in the top category paid approximately three percent or less on new auto loans. Borrowers in the Subprime category typically paid more than 13 percent on average.
The Limits of Your Credit Report
The score and history you receive with your credit report serves only as basic guide to your creditworthiness. Your auto financing lender will make the all the final decisions on loan approval, amount and interest rate. These decisions can be based on a variety of factors including specific lender need at the time.
Auto financing firms may also look at other factors that the credit bureaus don’t record. Your income and work history can play a significant role in your loan application process, and they don’t show up on your credit report.
“Secret” Scores in the Auto Financing Industry
As we mentioned before, your auto financing lender will most likely be using a different score than the one you received from a credit bureau to analyze your auto loan application. In fact, these lenders often utilize specially-adapted scoring models for their own needs.
For example, “auto-enhanced” and “auto-industry” variations of scoring models are common in the auto financing industry. These variations are designed to place more emphasis on past borrowing behavior applying to auto financing specifically.
Unfortunately, borrowers do not have any legal right to see these “secret” auto financing scores. That means that you can’t really learn why you’ve been scored a certain way, and there isn’t a lot you can do about the score either.
Considering all these facts, some experts believe that receiving your credit score from a credit bureau is basically worthless. However, most still think that it is important for consumers to have access to their credit reports and credit scores. They can still provide a lot of helpful information for those applying for auto loans, and they also allow consumers to fix major mistakes.
Canada Credit Financial’s blog is a free resource for credit challenge customers who have the desire to improve their lives by acquiring the knowledge required to increase their credit score. Our team understands that even good people are often forced to go through tough times. A divorce, a loss of income, an illness, or other similar circumstances out of your control might have put a toll on your credit history and your financial life. We want to help by giving you access to quality content that will provide you with the know-how, the tools, and the strategies to get back on your feet and enjoy the freedom of a healthy credit score.
Our writers specialise in automotive financing. To our knowledge, the purchase of the right vehicle, at the right price, financed from the right lender, at the right interest rate provides one of the fastest and most robust ways to rebuild your credit history. It’s impossible to erase bad credit, but rebuilding a solid and diligent payment history through a vehicle financing is a great way to separate yourself from your past credit bumps to enjoy a better future.
You can also use the information to protect your current credit, avoid pitfalls, and educate your children so they are prepared to enter the world equipped with the knowledge that will give them an edge and will allow them to fulfil all their dreams.
Credit is a great tool if used properly. At Canada Credit Financial, we want you to control your credit; we don’t want credit to control you.