Need a New Car Loan? Here Are 4 Tips to Get Your Credit Ready
Preparing your credit can put you in a position to secure better terms and a lower interest rate on a new car loan, saving you hundreds or even thousands of dollars in interest.
When you're buying a new car, a little upfront research can often save you a lot of money. Looking around for an affordable make and model with reasonable insurance costs is a good place to start. Shopping for the best deal on your vehicle of choice can be a smart idea, too.But there's another money-saving strategy that many people overlook. If you take some time to prepare your credit, you might put yourself in a position to secure better terms and a lower interest rate on your new car loan.
A more attractive auto financing package might save you hundreds or even thousands of dollars in interest. If you're in the market for a new vehicle loan, here are four tips that may help you get your credit ready.
1. Review your credit reports.
When you apply for a car loan, the lender will likely review your credit report from at least one major credit reporting agency—Equifax, TransUnion, or Experian. So, it's smart to check your three credit reports yourself first. If there are any surprises, you want to know about them before you start filling out new loan applications.
You can request your free credit reports online at AnnualCreditReport.com. If you prefer, you can also complete an Annual Credit Report Request Form and mail it to the address listed on the top of the form. The Fair Credit Reporting Act (FCRA) entitles you to a free report from each of the three credit bureaus once every 12 months.
As you look over your credit reports, keep an eye out for any information that seems incorrect or suspicious. If you discover any questionable items, you may need to take action.
2. Fix credit report errors, if you find any.
Errors on credit reports can cause a lot of problems, especially when you're seeking new financing like an auto loan. Credit reporting mistakes can impact your FICO® Scores and make you appear like a bigger credit risk than you are. Therefore, you should follow the process to dispute the errors on your credit reports if you discover any problems.
Some common credit reporting errors to look out for include:
- Mistakes regarding your personal information (name, Social Security number, date of birth, etc.)
- Accounts that don't belong to you
- Duplicate tradelines or collection accounts
- Outdated items that have been on your report too long
- Incorrect account balances
- Inaccurate late payments
Federal law (the FCRA) empowers you to dispute any incorrect information you discover on your credit reports. If you suspect that the inaccurate data on your credit report stems from identity theft, you may want to consider taking additional steps (such as a credit freeze or fraud alert) as well.
3. Reduce your debt—especially credit card balances.
Once you confirm that your credit reports are accurate, it may be a good idea to look at actionable ways to try to improve your FICO® Scores. Paying your bills on time is, of course, essential. But some people may also benefit from reducing certain types of debt like their credit card balances.
Credit utilization—also known as your credit card balance-to-limit ratio—is a key factor considered in your FICO Scores. In general, as you pay down your credit card balances, it should lower your credit utilization rate, which may have a positive effect on your FICO Scores.
Just remember that you shouldn't close unused credit cards in an effort to improve your FICO Scores. In some cases, closing a credit card might raise your credit utilization rate and trigger a score decrease instead.
4. Understand how much a better FICO® Score could benefit you.
90% of top lenders use FICO Scores to help guide their lending decisions. So, there's a good chance your FICO Score will be a factor when you apply for an auto loan.
Every lender sets its own standards when it comes to the credit score you need to buy a car. As a result, it can be difficult to pinpoint the precise FICO Score you'll need to qualify for an auto loan. Nonetheless, the following holds true. The higher your FICO Score, the better your odds of qualifying for a loan.
A better FICO Score can also help you save money in interest. The savings potential can sometimes be significant. For example, if you work hard (and wait) to improve your FICO Scores from 580 to 680, you might save around $8,000 on a $30,000 car loan with a five-year term.
Source: Loan Savings Calculator based on rates from April 2021.
You can use the myFICO Loan Savings Calculator yourself to estimate the interest an auto lender might charge you based on your current FICO® Score range and the state in which you live. This free tool can help you decide if now is a good time to apply for a new auto loan or whether you would be better off working toward a higher FICO Score range first.
Michelle Black, Founder of CreditWriter.com is a leading credit expert, financial writer, and speaker with nearly two decades of experience. Her work has been featured with major outlets such as Forbes, Reader's Digest, and U.S. News and World Report.