Your Credit Score & Credit Report
The most important information used if you plan to finance any aspect of your auto purchase is your credit score and your credit report. As part of the process in determining what type of auto you can afford, you need to understand what type of financing programs you may qualify for, and ensure your credit report and score are accurate.
Credit Report Overview
In the US, the vast majority of financial institutions use a consumer's credit history and credit score to evaluate the consumer's current financial strength, ability to repay credit over time, and whether or not they are willing to extend credit to you. When it comes to auto buying, qualifying for a auto loan or auto lease, and the associated terms of those financial programs are heavily tied to your credit history and score.
Back in 1956, the Fair Isaac Corporation (FICO) was established and to this day FICO is considered one of the leaders in the analysis and use of current and previous credit information to establish a consumer's ability to pay back credit offered by a finance company. Using the baseline methodology developed by FICO, over the years, 3 primary credit reporting agencies have emerged: Experian, Equifax, and TransUnion. If you have ever had a credit card, taken a loan, opened a checking/saving account, or used any product provided by a financial institution, chances are your Experian, Equifax, and/or TransUnion credit report and score were used. Your ongoing credit details (open accounts, payment history, outstanding balances, etc.) are collected by these companies in order to create a history, specific to you, on all aspects of your financial experience. Your current balances owed, your payment history (including if you ever paid late), how much access to credit you have...all of this is on your credit report, and used in setting your current credit score.
Credit Score Overview
With your credit history, FICO and the 3 credit bureaus create unique scores to help financial institutions easily analyze your credit strength and your ability to pay back credit that the finance company may extend to you. Although each credit score provider has its own specific nuances for calculating your score, most scores fall within the number spectrum of 300-850. With your credit report information, your credit score, and additional information provided by you at the time of application; finance companies use all of this information to make credit decisions. Although there is no agreed upon, industry wide, standard definitions associated with describing a individual's credit score, the following categorizations are often referenced:
720-850: Excellent or Super Prime
680-720: Good or Prime
620-680: Fair or Near Prime
550-620: Poor or Sub Prime
Below 550: Bad or Deep Sub Prime
Reviewing your Credit Reports and Credit Scores
Government Required Consumer Access To Your Credit Report: Because of the importance of the credit market to the US economy and to you as an individual, within the Fair Credit Reporting Act , the US government requires the 3 credit reporting agencies to provide you a free copy of your credit report, at your request, once every 12 months. Here at AutoBuying101.com we highly recommend taking advantage of this, as you should review your credit reports and scores before you apply for any type of auto financing. If there are any errors or inaccuracies in your credit report, that could greatly impact any auto finance terms offered to you. The FTC site provides the detailed information regarding obtaining your free credit reports, which are available at: AnnualCreditReport.com
CreditReport.com: along with the free access you can get to your credit report above, we suggest reviewing the options on the CreditReport.com website which is a division of one of the large bureaus, Experian. You can find educaitonal information regarding how your credit reports and credit scores are developed and used by financial institutions. They also provide useful products for obtaining your credit scores, monitoring inquires on your credit report, and helping protect against identify theft. So, visit their site if you want to consider obtaining your Credit Scores and Credit Report.
Your Auto Finance Options Based on Your Credit Reports & Scores
Once you have a good handle on your credit reports and credit scores, you should keep in mind the likelihood of qualifying for auto financing from different sources:
Good or Excellent Credit: if you fall in this category you will have numerous auto finance options available to you, and if you are Excellent, chances are you will qualify for special interest rate programs provided by manufacturer lending divisions (i.e. 0% and other low rate programs) as well as leasing programs.
Fair Credit: if your credit is Fair, it is highly unlikely that you will qualify for financing online or through direct to consumer auto loan providers. Many local auto dealers work with numerous local finance companies, so they still may be able to help you qualify for auto financing at higher interest rates.
Poor or Bad Credit: if you fall in this category, your ability to qualify for any type of financing is very unlikely. Some dealers have special programs for these consumers or provide "Buy Here, Pay Here" programs whereas the dealer acts as a lender. In these cases you will only qualify for older model vehicles at lower price points, which reduce the dealer's financial risk. If you fall in this category, you should definitely pursue ways to improve your credit. If you still need to buy a auto, we recommend trying to purchase a quality used auto that you can buy with cash.
Never visit a auto dealer without knowing your credit report and credit score. In addition, try and pre-qualify for auto financing through reputable sources before you go shopping.