You Auto Know About Credit!
How your Credit History Impacts your Car Insurance Rates.
We are a numbers society. And as much as you might get a giggle out of our catchy article title, when it comes to purchasing a car only one number matters - your credit score!
Your credit score, or credit history, will affect your car insurance rates, and it may even have an impact over whether you qualify for a car loan at all. It’s a serious matter – especially when you have bad credit. It’s a sad truth that we are stereotyped based the 3 little digits that make up our credit scores, but most lenders will use these 3 digits to decide if you are high risk or low risk when it comes to borrowing and paying off credit.
What’s the difference between a high risk and a low risk credit score?
If you’re deemed a high risk borrower - that means you have a credit score of 620 or lower. To a lender this indicates that you haven’t been very responsible with credit in the past. Perhaps you defaulted on a loan, or continuously maxed out your credit cards. Or maybe you just keep forgetting to pay off the balance of your credit cards on time, or maybe you tend to carry a large balance on your credit card from month to month - racking up interest. Either way, a high credit risk will always run into roadblocks when being considered for a loan. If you are approved for a car loan you will probably pay higher interest rates, and you will likely have a less flexible repayment plan when it comes to the length and payment options on your car loan. The worse case scenario may be that some lenders who won’t consider loaning you money for that automobile you want at all!
If you’re deemed a low risk borrower – it means your credit score is above 750 – that’s great news if you’re waiting for approval on a car loan! You can bet you will be approved and you’ll receive the lowest interest rates and the most flexible repayment options on your car loan. This is because your credit score tells the lender than you are a responsible borrower who will pay back their debt in full – and on time.
Now you’re probably wondering what specific financial factors will impact your credit score – or basically your ability to secure that car loan – to a lender. FICO (the Fair Isaac Company) is the organization that came up with the mathematical equation that determines your credit score. Well the exact FICO formula is kind of like the “Cadbury Secret”, and credit companies aren’t about to tattle. However that doesn’t mean we don’t have some speculations on what exact factors affect your credit score.
If you’re concerned about building a great credit score – and you should be – you need to concentrate on the following financial factors. The key to keeping your credit score high and clean is by making sure you follow our 5 good credit tips:
- Pay your credit cards and loan payments on time – The payments you make – or don’t make – on your credit cards and loans are speculated to have a 35 percent affect on your credit score (or your FICO score). Your credit history keeps a detailed account of:
- When you make payments
- What you charge to your credit cards
- If you pay off your debts in full and on time
- Any outstanding debt
- If you make late payments
- If you default on payments
- Your last payment date
- If you carry over a large balance from month to month
- If you max your credit cards out often
- If you transfer payments (from one credit card to another with a lower interest rate)
- If you go over your credit limit regularly
- Any current and outstanding debt – Any outstanding (owing) balances that you have on your credit cards or still owing on your loans are expected to have a 30 percent impact on your credit score. Creditors don’t like to see that you owe a lot of money to other creditors. It’s not so much that you have other loans and credit cards – that won’t hurt your credit score. However if your other loans are for large amounts and every other credit card you have is close to it’s limit and carrying a high balance – it will affect your credit score negatively.
- How long you’ve been using credit – Meaning the length of your credit history will impact your credit score by about 15 percent. This explains why you can’t get a loan without a co-signer if you’ve never had a credit card or personal loan of your own. Our advice would be to get a credit card and use it responsibly to build up a good credit score. However if you’ve had a long credit history, but you have a habit of defaulting on loans and payments this will negatively impact your credit score. Keep in mind that more current late payments will impact your credit score a lot more than late payments that happened years ago.
- Multiple and new credit cards – If you have a habit of applying for a new credit card every time your mail arrives, keep in mind that it has approximately a 10 percent impact on your credit rating. Many people don’t realize that FICO grades your credit score based on how many different types of credit you have, and how long you’ve had them. FICO likes to see long-standing and responsible credit histories, not a ton of new maxed out credit cards on your record. This will definitely negatively impact your credit score, and impact your approval for a car loan.
- Types of credit – Even though this only has a 10 percent affect on your credit score, and has the least amount of impact on your credit score according to FICO. Creditors are still impressed when your credit is varied, meaning you might have a mortgage, previous car loans, personal loans, student loan and maybe a few credit cards. It’s not so much that you owe a bunch of different creditors, FICO is more concerned with: Who you owe? What you owe (the balance)? And if you are able to make your payments in full and on time?
In addition to your credit score, the amount you will get in a car loan depends on some of the following additional financial factors:
- Are you a homeowner?
- Your personal assets
- Have you had a car loan in the past? Did you make payments on time? Did you pay it off in full?
- What are your assets worth (valuables, property, etc.)?
- Do you have investments?
- How much do you have in your savings/checking accounts?
- Do you have other loans – student loans, mortgages, personal loans, etc.?
- Have you defaulted on a loan in the past?
All of the above factors will affect your credit score – either negatively or positively - and will determine how forthcoming lenders are with auto loans. If you have been responsible with building yourself a solid credit history, you will no doubt drive off the lot with the car of your dreams. However if you have been irresponsible with credit in the past, you may have trouble securing a car loan that you can afford. Perhaps it’s wise to purchase a cheaper car until you can build up your credit score and trust yourself to handle higher car payments.
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