Having good credit is an important goal for every adult to set, but it is never more important for a consumer to have good credit than when he is preparing to make a major purchase - such as a home or a vehicle. If you are planning to apply for a new auto loan in the near future then check out these 5 steps to make sure your credit reports and credit scores are ready before you ever submit your first application.
Step One: Don't Allow Impulse to Drive You.
Give yourself enough time to bring about actionable changes on your credit reports. Buying a car is often very impulsive, certainly more impulsive than purchasing a home. However, deciding to purchase a new vehicle on impulse may be a financial mistake. Trying to purchase a vehicle without making sure your credit is in tip top shape first can result in higher interest rates, less favorable terms, higher monthly payments, and even an outright denial for a loan.
Step Two: Check Your Credit Reports.
Checking credit reports several times a year is an important habit for every consumer to develop. The importance of checking your credit is only compounded further when you are preparing to apply for a loan. Thanks to the Fair and Accurate Credit Transactions Act (FACTA) everyone has the right to a free credit report from each of the 3 credit bureaus every year via www.annualcreditreport.com. Surprisingly, even though the right to access these free reports has been available since 2003, only 4% of the available free reports are claimed annually.
Unfortunately there is currently no law which grants consumers free access to their 3 credit scores. Still, there are several websites online which offer a free or $1 view of all 3 of a consumer's credit scores as part of a trial offer for their credit monitoring services. Greatcredit101.com offers a comparison between several of the most popular credit score offers.
Step Three: Correct Errors.
If you think that credit reporting errors are rare, think again. In fact the Federal Trade Commission conducted a study on credit reporting accuracy in 2013 which concluded that over 40 million mistakes could be found on the credit reports of American consumers. Errors happen, but thankfully you have the right to dispute errors when they occur. Consumers can dispute credit report errors on their own or with the help of a reputable credit repair professional. (CLICK HERE to schedule a no-obligation credit analysis with a HOPE4USA Credit Expert.)
It is worth noting that auto lenders will not be checking all 3 of your credit reports and scores like a mortgage lender would do. However, that does not mean that you should try to take a shortcut and focus on correcting the errors on only 1 of your 3 credit reports. Different auto lenders will use different credit reports in their application processes. In other words, if you apply for a loan with ABC Bank they may pull an Equifax report but if you apply with XYZ Bank they might pull a report from Experian instead. Take a tip from the Boy Scouts and "Be prepared!" so that regardless of which credit report is pulled you will not have to worry about any unpleasant surprises.
Step Four: Take a Long, Hard Look at Your Credit Card Balances.
Arguably the most actionable way for a consumer to see a credit score improvement within a relatively short period of time is to pay down his credit card balances. Credit card balances almost always have a negative credit score impact even when the monthly payments for the accounts are made on time. Believe it or not, a whopping 30% of a consumer's FICO credit scores are based in large part upon the amount of credit card debt he carries. The lower a consumer's credit card balances the better the impact will be upon his credit scores. (CLICK HERE to read The Ideal Credit Card Balance to Optimize Credit Scores.)
Step Five: Choose the Right Lender for Your Credit.
The last step to preparing for your auto loan is picking the right lender for your credit. Consumers with great credit are often best served by applying for financing with a "captive" lender. A captive lender is simply the financing option available through the manufacturer of the vehicle (i.e. Chrysler Financial). Captive lenders often offer financing at very low rates, sometimes even 0%, as an enticement for consumers with pristine credit to purchase their vehicle over a vehicle made by another auto manufacturer.
Consumers with good, but less than perfect credit should consider checking out the financing options available through their local bank or credit union. Finally, remember that it is smart to ask questions and to rate shop before settling on a lender as well. Purchasing a vehicle is one of the most expensive purchases that an average consumer makes. It pays to take the time to prepare for your best possible outcome ahead of time.
Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.