A car is a very significant purchase for most people, and one that is best made when your credit score is solid. Yet, when most people set out to purchase a vehicle, they tend to focus on the more trivial questions first: color, new versus used, special features. Then reality sets in and the more serious, financially based considerations come into play:
- How much can you afford and what would your monthly payment be?
- Do you need a down payment?
- How would trading in your current car affect the purchase?
- Do you have a preferred auto loan term? And what does that mean to your long-term financial goals?
All of these questions are important. It’s worthwhile to take a good look at your finances to be sure it’s the right time to purchase a car. But it’s equally important to look beyond your budget and consider your credit. Having a good credit score can really expand your opportunities when it comes to purchasing a vehicle. The two biggest components of your credit score are your payment history and how much you owe.
- Payment History — Your payment history makes up 35% of your score. Because this is such a large portion of your score, it’s important to always pay your bills on time, every time. The reason is that missing a payment can really drop your score, making it harder to get loans. Showing a history of missed or late payments can negatively impact your loan rate and cost you more money over time. Banks and car dealerships that extend lines of credit want to make sure you will pay them back.
- Credit Use — How much you owe makes up 30% of your score. This is commonly known as “capacity.” This portion of your score will be affected if you’re using a large percentage of your available credit. If this is the case, you might not be as appealing to potential finance lenders.
There are a few reasons to be knowledgeable about your credit situation and your credit score before you decide to take out a car loan:
When you think you’re ready to buy, follow these steps to leverage your credit and get the best deal on your new car:
- Pull your credit report* to see if you have any adverse accounts. Even if you’ve paid your bills on time and don’t have extensive debt, it’s still good to check just to make sure everything is accurate, and you didn’t miss something. If you do find you have any issues, take care of them. You might have to pay off outstanding debt, deal with debt collectors, or even call the credit reporting agency to correct inaccuracies.
- Review and calculate your debts. Your credit report will not include your credit score unless you pay for it. However, it will have all of your debts listed and whether you’ve made timely payments.
- Assess your income and expenses. Do you make enough money to pay off your debts? Are you totally debt free? The answer to these questions is important because your loan officer will see your credit report and may ask you questions about it.
- The last step is to research the best car that fits into your personal financial situation. It might not be your dream car, but it should be one that lines up with your stage of life and your ability to make the payments.
Before you buy a car, take the time to look at your finances carefully to see what you can afford. A car is a huge purchase and one that is best made when your credit score is better than average. Do your future self a favor and make sure you can make the payments easily so you can live without stress for years to come.
*There are three major credit reporting agencies – Equifax, Experian, and Trans Union. Your credit history and credit score may vary from agency to agency as not all lenders report their credit histories to all three agencies. It is important that you check all three agencies periodically to be sure that you get a complete picture of credit.
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