A really successful car purchase is about more than bargaining at the dealership. Getting the best possible loan can help you pay less, and may even help you afford a better car.
If you’re starting to look at auto loan options, you might be wondering what you can do to boost your credit score. This can be a stressful topic, but there’s a lot you can do to improve your credit and increase your chances of getting approved for a great loan that will allow you to buy the car you’ve always wanted.
Today, we’ll go over:
- What lenders look at when you apply for a loan
- What having a “good” credit score means
- What you can do to improve your credit score for auto loan purposes
- How a credit union can offer you better loan options, regardless of your credit score
What Affects Your Loan Eligibility?
Lenders look at many factors, including your credit score, to decide how likely they think you are to be able to repay a loan. That’s why it’s easier for people with high credit scores to get approved for loans and to get better interest rates.
Most lenders consider factors like:
- Credit history: This includes your three-digit credit score and possibly your credit report.
- Debt-to-income ratio: Some lenders want to see proof of employment and/or income.
- Down payment amount: A larger down payment means the lender takes on less risk.
- Loan term: Typically, a shorter loan term means higher monthly payments but less total dollars paid over the life of the loan.
Different lenders have different requirements for giving loans, and these requirements are often partially dependent on their business needs and obligations to their stockholders. That’s just one of the reasons why credit unions can offer more flexible loan options than banks, on average.
What Is a Good Credit Score for an Auto Loan?
What should you be aiming for? FICO Scores are one of the most well-known types of credit scores and one of the most commonly used by lenders. Generally, a FICO Score above 680 is considered good. Above 730 is very good. Above 800 is exceptional.
What Affects Your Credit Score?
In order to improve your credit score, you need to know what factors affect it, right? According to Experian, one of three major credit reporting agencies in the US, these are the most important factors that influence your credit score:
- Payment history (whether you make payments on time)
- Credit utilization rate (how much of your total credit limits you’re using)
- Number, type, and age of your credit accounts (longer credit history benefits your score)
- Total debt
- Public records (including bankruptcy, civil judgments, and tax liens)
- Number of new credit accounts you’ve recently opened
- Number of inquiries for your credit report
- Credit mix (how many different types of accounts you have)
Different types of credit scores consider different factors and weight them differently, so some of those factors may not be relevant, depending on which credit score a lender is using. This is why your FICO Score might look slightly different than your VantageScore, for example.
How to Improve Your Credit
OK, now that we’ve covered what affects your credit score, it’s easier to see what steps you can take to improve credit.
Check Your Current Credit Score
See if your credit card company or bank provides credit scores to customers. You can also purchase your score directly from a credit reporting agency or other company, like FICO. Free credit scoring sites can be helpful too. Just make sure it’s clear how they’re calculating your score.
If you’re a Valley Credit Union member (or would like to become one) we are happy to help you determine and manage your credit score. As a member, you have access to a financial tool called “Credit Sense” which gives you access to your score at any time and will monitor your credit information daily.
Request a Credit Report
Make sure there are no mistakes or fraud-related inconsistencies on your report that could be hurting your credit score. Go to www.annualcreditreport.com or call 1-877-322-8228 to request a free credit report.
Make Payments On Time
Your payment history is the biggest factor that affects your credit score. The most important thing you can do for your credit score is to keep your credit card balances low and consistently pay your bills on time.
Lower Your Credit Utilization Rate
Your credit utilization rate can impact up to 30% of your credit score, depending on which type of score is being used. It’s always good to pay down your current credit card balances before applying for a loan.
Pay Off Other Debt
Do you currently have mortgage loans, student loans, or other debt? Get rid of as much existing debt as you can before you request an auto loan. Even if you can’t fully pay off any debt right now, making your payments on time will help a lot.
Save for a Down Payment
While saving money won’t improve your credit score, it may still help you get a good loan. If you’re worried you may not be approved, you can increase your chances by making a larger down payment towards your vehicle. This way, you can take out a smaller loan, which means less risk for the lender.
Get Better Rates and More Options with Valley Credit Union
As not-for-profit cooperatives, credit unions are typically able to offer lower interest rates and better loan options. At Valley Credit Union, we can work with you to customize your loan to fit your lifestyle and set up a payment plan that works for you.
Maybe you’re dealing with past credit issues. Maybe you want to buy your first car, but you haven’t built up much credit yet. Or maybe you have stellar credit, but you’re not happy with traditional bank loan options. Whatever your situation, we’d love to help. We even offer free rate quotes. Send us a message, stop by our office, or apply online to get started.