Experian, TransUnion and Equifax now offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com.
You should wait to finance a new car until you are certain that your credit is in good standing, just as you wouldn’t go on a cross-country road trip without first checking your car’s tires and filling up the tank. By paying off debt, keeping your credit score low, and avoiding applying for new credit, you can prepare your credit for the purchase of a car.
Lenders will look at your credit score, debt-to-income ratio, and consistent source of income when determining your eligibility for an auto loan. These seven steps will help get your credit ready to buy a car.
Dreaming of a new car but worried your credit score might hold you back? Don’t fret! While a good credit score can unlock lower interest rates and better loan terms, it’s not the end of the road if your credit isn’t stellar. With some strategic moves and a bit of effort, you can fix your credit quickly and get behind the wheel of your dream car sooner than you think.
Here’s your roadmap to a credit-worthy future:
Step 1: Check Your Credit Report and Score
Think of your credit report as your financial report card. It details your credit history, including loans, credit cards, and payment behavior. This information is used to calculate your credit score, a three-digit number that lenders use to assess your creditworthiness.
Where to find your credit report and score:
- AnnualCreditReport.com: Get a free copy of your credit report from all three major credit bureaus (Experian, TransUnion, and Equifax) once a week until April 2021.
- Credit monitoring services: Many banks and credit card companies offer free credit monitoring services that provide access to your credit score and report.
What to look for in your credit report:
- Errors: Check for any inaccuracies or outdated information, such as accounts you’ve closed or payments you’ve made on time. Dispute any errors with the credit bureaus.
- Negative items: Identify any negative items like late payments, collections, or charge-offs. These can significantly impact your credit score.
Step 2: Pay Your Bills on Time Every Time
Your payment history is the most crucial factor in your credit score, accounting for 35% of the total. Even a single late payment can ding your score, so make timely payments a top priority.
Tips for staying on top of payments:
- Set up automatic payments: Schedule automatic payments from your bank account to ensure you never miss a due date.
- Use reminders: Set calendar reminders or use budgeting apps to stay on top of upcoming payments.
- Prioritize credit card payments: Focus on paying off credit card balances with high interest rates first.
Step 3: Reduce Your Credit Utilization Ratio
Your credit utilization ratio measures how much of your available credit you’re using. Ideally, aim for a ratio below 30%. For example, if you have a credit card with a $10,000 limit, try to keep your balance below $3,000.
How to lower your credit utilization ratio:
- Pay down credit card balances: Focus on paying off cards with the highest balances first.
- Request credit limit increases: Ask your credit card issuer to increase your credit limit, which can lower your utilization ratio without increasing your spending.
- Become an authorized user: Ask a friend or family member with good credit to add you as an authorized user on their credit card. This can help you build credit without opening a new account.
Step 4: Limit New Credit Applications
A hard inquiry is made on your credit report each time you apply for new credit. Multiple hard inquiries within a short period can lower your score.
How to minimize hard inquiries:
- Shop for loans within a short window: Credit scoring models typically group multiple inquiries for the same type of loan within a 14-day or 45-day window as a single inquiry.
- Get pre-approved for loans: Pre-approvals usually involve soft inquiries, which don’t impact your credit score.
Step 5: Dispute Credit Report Errors
Do not hesitate to dispute any errors you discover on your credit report with the credit reporting agencies. You can do this online, by mail, or by phone. The credit bureaus will look into the disputed items and, if needed, update your report.
Step 6: Consider a Secured Credit Card
A secured credit card can be an important resource if you have poor credit or a limited credit history. Making a security deposit on a secured card raises your credit limit. Your credit score can rise as long as you make on-time payments and use the card responsibly.
Step 7: Be Patient and Persistent
Building good credit takes time and effort. Don’t get discouraged if you don’t see immediate results. Keep at it, and you’ll eventually reach your credit goals.
Bonus Tip: Consider Experian Boost®
Experian Boost® is a free service that allows you to add positive payment history for utility bills, phone bills, and other recurring payments to your Experian credit report. This can help boost your credit score instantly.
Remember:
- Fixing your credit takes time and effort, but it’s definitely achievable.
- By following these steps, you can improve your credit score and qualify for better loan terms on your new car.
- Don’t hesitate to seek help from a credit counselor or financial advisor if you need assistance.
Now, get out there and start cruising towards your dream car!
Focus on Paying Down Credit Card Debt
Take care not to take on any new debt while you prepare to apply for a car loan. By lowering your credit utilization ratio, paying off existing credit card debt can raise your credit score. Your credit utilization ratio, which is the second most significant component in your credit scores after payment history, indicates how much of the available credit on your credit cards you are actually using.
To calculate your credit utilization ratio, compare the total limits on your credit accounts to the balances. Lenders typically like to see a credit utilization ratio of 30% or less. Carrying a balance of $5,000 (41 percent of the available credit) could potentially harm your scores, for instance, if your total available credit is $12,000. Even if low credit utilization on one card balances high credit utilization on another, the balance-to-limit ratio on each card matters as well.
Due to the increased risk you represent to lenders, high credit utilization may make them less willing to take you on as a borrower. Your debt-to-income ratio (DTI), which contrasts your monthly gross income with all of your recurring monthly debt, will decrease if you reduce your credit utilization. To determine whether you could afford monthly payments on a loan or credit card, lenders look at your DTI.
Only Apply for Credit if You Really Need To
A hard inquiry related to a credit application may result in a brief reduction in your credit score. A single hard inquiry normally has a temporary, negligible effect on your credit score, lasting only a few months. However, you might come across as a higher credit risk if your credit report reveals multiple hard inquiries in a brief period of time.
Credit scoring models know that borrowers want to compare rates from multiple lenders, so how can you shop around for an auto loan without accruing too many hard inquiries? Credit scoring models usually treat multiple applications for the same type of loan submitted within a given timeframe as a single hard inquiry. The application window differs depending on the scoring company: FICO groups comparable applications submitted over a 45-day period, while VantageScore® uses a 14-day period.
You can compare loan offers without generating any hard inquiries by getting preapproved for an auto loan. Preapproval credit checks are typically regarded as soft inquiries, meaning they have no effect on your credit scores.
Keep in mind that preapproval is only a conditional loan offer. Youll still need to get final approval from the lender. Preapproval, however, can give you a precise estimate of the amount of car you can afford and the cost of the loan. It can also give you more negotiating power at the dealership.
How To Fix A BAD Credit Score ASAP
How do I get a car loan if I have bad credit?
One of the simplest ways to get a car loan when you have bad credit is to find a good cosigner you trust who has good credit. The point of a cosigner is to basically say to the bank, “if I can’t pay back this loan, my cosigner will.” 2. Take Out the Third Party Lender
How do I get my credit ready to buy a car?
You can get your credit ready to buy a car by paying your bills on time, paying down debt and minimizing other applications for new credit. When lenders assess your eligibility for an auto loan, they’ll want to see that you have a steady source of income, a low debt-to-income ratio and a good credit score.
How can I improve my credit score for a car loan?
Consider paying down any existing debt to bring down your DTI ratio alongside other methods of improving your credit score. Your credit rating plays a significant role in the interest rate you receive for a car loan. So, you want to get your credit in tip-top shape before you apply, starting with these actionable tips.
How do I clean up my credit before getting a car loan?
Focus on these areas if you’re aiming to clean up your credit before applying for an auto loan: Pay off debts. The less debt you have, the more worthy you are of a new loan. While saving money for a down payment, consider paying down balances on revolving accounts like credit cards. Pay off other outstanding balances as soon as possible.