Understanding How Your Credit Can Affect Buying a Car

When you’re thinking about buying a new car, there’s more to consider than just what make and model you want to purchase. Along with making sure your car has a high safety rating and a large enough trunk to fit groceries, a stroller and soccer equipment, you’ll also want to be sure that your credit is in good shape so you can qualify for financing and get the best finance rate possible.

Why Does My Credit Score Matter?

According to About.com, rates on financing can vary a great deal depending on your credit score. When you consider that one of the factors banks and finance companies use to determine what rate they offer is their perceived risk from your credit history, it’s pretty clear that it pays to have better credit.

Knowing what affects your credit score prior to shopping for a new car will help you understand where your credit stands. Keep in mind that because credit scores take into account your history, not just current circumstances, it could take time to see improvement in your credit score. Every year, as required by the Fair Credit Reporting Act (FCRA), consumers can request a free credit report from the three credit bureaus (Experian, TransUnion and Equifax). By visiting AnnualCreditReport.com, you can get your free report and gain a better understanding of what areas you need to improve upon before making your big purchase. Also, as the Consumer Finance Protection Bureau points out, reviewing your credit report for  information that you believe is  inaccurate and contacting creditors to change it could help improve your credit score.

What Do I Do If I Have a Less-Than-Stellar Credit Score?

As Edmunds.com points out, if your credit score is not the greatest, you may still have auto-financing options. They recommend taking a few steps to make sure you’re in the best shape possible prior to applying for financing. Making payments on time and ensuring all the information on your credit report is correct could help you save  money every month. Bankrate.com has a great list of seven simple ways to improve your credit score.

Just how much can a high credit score pay off? MyFICO has a chart that breaks down FICO scores with examples annual percentage rates and monthly payments based on FICO credit scores.

If I Pay Off My Financing, Will That Help My Credit?

In the world of credit, things are not always as cut and dry as they seem. For instance, there are two types of credit that are very different: revolving and installment accounts. According to Yahoo Finance, revolving accounts are designed to allow you to fluctuate the balance of your account from month to month and the account remains open even if your balance is zero. A credit card is an example of a revolving account.  Installment accounts, however, have a set, agreed upon number of payments at the outset, and once your account is at zero, it’s closed. Traditional mortgage loans and automobile financing are examples of installment accounts. While paying off your accounts – whether they’re revolving or installment –  shouldn’t hurt your credit, it’s much more of a boon to your score when you pay off a revolving account as opposed to an installment account. The difference is that when you leave your installment account open, showing that you’re making payments on time and being responsible, that’s factored into credit scores in a way that’s better for your score than if you paid it off and closed it.

Will Shopping for Auto Financing Hurt My Credit?

The answer is yes and no. Having your credit checked as you try to find the right option for you can cause your credit score to dip very slightly, probably between one and five points according to the Consumer Finance Bureau. However, they note that for auto financing, the credit scoring models often factor in that you’re shopping around and therefore multiple credit checks are likely to count as only one credit check, if done within a relatively short period of time (around two weeks).

It’s easy to lose sight of financing once you have your eye on a new ride, but it pays to maintain a good credit score. Do you have credit tips to share? Let us know in the comments below!

Other Posts You Might Like:

How To Be a Financially Savvy Driver
Credit Scores: What Goes Into Them and What Affects Them [INFOGRAPHIC] To Lease or Buy: Which is Right for You?

 

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