Dealerships, banks, credit unions -- they all use your credit report and credit scores to get an idea of how risky it would be to give you an auto loan.
If you have good credit, you should be able to count on a car loan with low interest rates; if you have bad credit, car loans with reasonable interest rates are harder to obtain.
Your credit report is a record of your credit history, and typically shows information such as:
- Personally identifying information (PII) like your name, gender, birth date, address, Social Security number (SSN), and employment.
- Information about current and past credit accounts.
- Public records often dealing with bankruptcies and financial judgments against you.
- All credit history inquiries (whenever you or another party has requested your credit report).
- Any consumer statements you've posted to explain the situation should a credit dispute not be resolved in your favor.*
* Per the Fair Credit Reporting Act (FCRA), you have the right to seek corrections for inaccurate credit information.
Credit Reports and Car Loans
Your credit report will have a big impact on your ability to get approved for an auto loan at a low rate.
Car loan lenders will especially take into consideration any items regarding past or current auto loans. If you have had a car repossessed due to failure to pay a past car loan, you can expect to have a difficult time getting approved for another car loan.
On the other hand, if you have a history of paying car loans on time, you will probably find that lenders will be more willing to give you a competitive car loan.
The first thing you should know about credit scores is that there are several credit scores available. The score you get from one credit reporting company is probably going to be different than the score you get from another company.
Secondly, you should know that your credit score is directly linked with your credit report. Credit scores are determined by what is on your credit report.
Typically, credit scores range 300 to 550 (poor) to 740 to 850 (excellent).
For decades, the FICO score has been the industry standard for credit scores, with the majority of lenders (including auto loan lenders) using FICO scores to determine the risk of giving you a loan or credit line.
True to the larger world of credit scores, you don't have just one FICO score. This is because different types of lenders value different score factors more than others.
FICO scores act as predictors of your future credit-related behavior. For example, your FICO score will give potential lenders an idea of how likely you are to pay your bills on time. FICO scores do this by analyzing five categories:
- The types of credit in use.
- The amount you owe.
- Your credit payment history.
- The length of your credit history.
- Any new credit.
When a potential auto loan lender is looking at your credit score, they are probably evaluating a FICO score that is weighted towards auto loans. This means that items on your credit report relating to auto loans are factored into the score more than other items.
Other Credit Scores
While some lenders may look at other credit scores besides a FICO score, most non-FICO credit scores are considered educational credit scores. This is because the primary purpose of these types of credit scores is to inform you (the consumer) about your credit score, rather than inform lenders or creditors.
Most credit scores are based on your credit report using very similar factors as those used to determine FICO scores.
While these types of credit scores are not official FICO scores, they can still provide value to you by giving you a basic idea of where your credit stands.
You can order a credit report and check your credit score using one of “The Big 3" agencies or by hiring a third-party company. Most of these companies allow you to get your credit report online.
When getting your credit report be prepared to provide the following:
- Your name and any other names you have been known by.
- Your last 3 addresses.
- Your date of birth.
- Your Social Security Number.
Credit Reporting: The Big 3
Commonly known as “The Big 3," the following nationwide credit reporting bureaus are the ones from which all dependable credit reports come:
Per the FCRA, each of these companies must provide you with a free annual credit report. Of course, you can also obtain additional services such as identity theft monitoring for nominal fees.
Third-Party Credit Reports
In addition to getting your credit report from one of the Big 3 bureaus, you can order a credit report from one of several third-party credit report providers. Like the big-name agencies, many of these companies offset their service by offering other services or products you can purchase, such as identity theft protection or credit fraud alerts.
It is important to note that credit reports offered by third-party companies are usually obtained through one (or all) of the Big 3 bureaus.
It is always a good idea to check your credit report and score before shopping for an auto loan.
By reviewing your credit report and score, you can:
- Address any errors on your report.
- Take actions to improve your credit score (if necessary).
- Get a better idea of the rates you can get.
- Have leverage when a lender offers you an auto loan that doesn't meet your expectations.
Your credit is huge when it comes to getting an auto loan. Remember to stay on top of it and use it as a tool to your benefit.