You shouldn’t attempt to drive cross-country without checking your oil. Likewise, don’t think about buying a car without knowing your credit score. After all, you’re probably spending $15,000 or more for that new ride, so you want the best score to save on interest.
Keep the following tips in mind to boost your credit score. Then your car loan won’t cost you nearly as much.
Check Your Credit
It might sound obvious, but you’d be surprised by how many people shop for loans without checking their credit score. You should check your credit score before car-loan shopping so you have some idea what you’ll qualify for.
It’s not hard to qualify for a car loan with a mediocre credit score, but you should expect to pay more in interest. You also might need a cosigner. Standards vary, but many lenders want to see at least a 700 credit score for the best interest rates.
You can get a free credit report through Experian. When you access your report, look at the risk factors to see what may be dropping your score.
Also, check out your credit report with the other two credit reporting agencies: TransUnion and Equifax. If you find something incorrect on your credit report, you can submit a dispute and try to get it fixed.
Pay All Bills On Time
Payment history is the top factor for credit scores; it accounts for 35% of your score. If you want to raise your credit score, start paying all your bills on time. When you catch up on payments, make sure you keep it that way.
It’s easy to forget due dates on bills, but you can avoid this problem by making automatic payments. Or set up payment reminders on your cell phone to ensure you never miss a payment.
Cell phone and utility bills don’t usually get reported. But you could get a credit lift for paying such bills on time if you use Experian Boost.
This is a free service that reports all timely bill payments, even for streaming services such as Netflix, to the three credit bureaus. Using this nifty service can help to raise your score over time.
Only Apply For Credit You Need
Most of the time, applying for credit means a hard inquiry gets noted on your credit report. This inquiry can lower your score by a few points. If you have several such inquiries on your report in one month, you look like a higher risk to car loan companies.
If you submit several car loan applications within the same 30-day window, most credit scoring models treat this as a single inquiry.
You can look at several car loan offers without hard inquiries on your credit report if you get a car loan pre-approval. When the financing company checks your credit, it usually is a soft inquiry and doesn’t affect your credit score.
Pay Down Debt
When you’re preparing for a car loan, remember to avoid new debt if you can. If you have credit card debt now, paying it down can quickly boost your score because it drops the credit utilization ratio.
The credit utilization ratio measures how much available credit you are using on all your cards. Credit utilization is one of the most critical factors that affect credit scores.
You can figure out this ratio by comparing your credit cards’ limits to your balances. Most car loan providers want to see 30% credit utilization or less.
For instance, if you have $12,000 of credit available, having $5000 in credit card balances (40%) can damage your credit score. Using most of your available credit raises the lender’s risk, so expect to pay a higher interest rate on your car loan.
Following these tips will ensure that your credit score is in top shape when you buy your new car!