The Impact of Your Credit Score on Car Loan Interest
Everything you ever wanted to know about the credit score system and how it effects your car loan interest. Plus information on bad credit report repair.
What You'll Find Here
- What Does Your Score Mean?
- How Much Does a Low Score Cost You?
- Bad Credit Report Repair
- More On Your Credit Score
What Does Your Score Mean?
The Credit Score rating system (called the FICO score) is meant to develop a snapshot of the risk you currently represent to a lender. Several parameters in your credit file, including length of credit history, number of open accounts, loans, mortgages, public records, and others are formulated to produce a three-digit score between 300 and 950.
Usually a lender will use a combination of your credit score with other factors when determining your risk. They all have the same objective, to determine the borrower's potential risk. Regardless of how the score was generated, they all yield an industry standard three-digit score. This score places the borrower in one of the three main categories.
Prime - If your credit score is above 680, you are considered a "prime borrower" and will have no problem getting a good interest rate on your home loan, car loan or credit card. You can generally buy a house with no or very little money down.
Mid-Prime - if your credit score is below 680 but above 620 (600 with some companies) you are' mid-prime". You may pay a slightly higher interest rate on your loan. You will most likely need to have some funds for down payment on a home purchase.
Sub-Prime - Below 620 is sub-prime. At least that is how most lenders and credit issuers perceive it. You can still get a credit card but you will likely be hit with a security deposit and high fees. In addition, your interest rate will likely be higher (up to 20% on credit cards). You can forget about most "no down payment" home loans and the majority of new car loans at this score. Below 600 is no place to be. You will pay much, much more in higher interest and unnecessary fees. You may even pay more for you insurance rates. A score below 560 or having no credit score will require a 15-20% down payment.
Your credit score is only one of several factors that will influence the interest rate of a loan. Others include: Amount of down payment, term of loan, size of loan, prior home ownership and other compensating factors (employment history, debt load, etc.
How Much Does a Low Score Cost You?
Credit cards - Most, if not all prime credit cards are entirely out of reach to consumers with bad credit. And the few credit cards that are available to them (known as "sub-prime" cards) typically require exorbitant setup fees or recurring monthly fees, offer very low credit lines, often require cash deposits, and in most cases do not even report your positive credit activity to the credit bureaus.
Automobile Financing - If you are making payments on a car, you are probably paying between $5,000 and $9,000 more just for having bad credit. This added interest shows up every month in a higher payment.
Take a look:
As you can see, a low score can cost you hundreds of dollars per month. Which is why it is so important to obtain, and maintain as high a score as possible?
Bad Credit Report Repair
Now that you know how your score is calculated, you can begin making changes to your current financial planning that will begin the process of repairing your credit score. Here's what you can do:
1. Pay your bills on time. Sounds simple, but this is the biggest thing you can do to keep your score high. Delinquent payments and collections have a major negative impact on a score.
2. Keep your balances low on unsecured revolving debt like credit cards. High outstanding balances can affect a score.
3. The amount of your unused credit is an important factor in calculating your score. You should only apply for credit that you need.
4. Make sure the information in your credit report is correct. If not, dispute it with the credit agencies and/or with the creditor directly.
5. Removing negative items on your credit reports has the biggest impact on your FICO score.
