Madison Credit Union Blog

Which Type of Account Is Typically the Most Liquid – Liquidity vs Yield

Saving money is important, but you have to know what to do with it to build long-term wealth. There are many ways to grow your money, from savings accounts to physical assets.

Many people understand that investments are the best way to build wealth due to the potential yield they offer, but investing involves taking on a certain level of risk. If you decide to invest most of your savings, it’s a good idea to keep some liquid money aside that’s easily accessible when you need it.

Imagine if you were to suddenly lose your job or got hit with some other type of financial hardship. It might take a while to pull your investments out to gain some cash, and you don’t want to rely on selling your non-liquid assets, such as your home. If this potential scenario is a concern for you, you might ask yourself which type of account is typically the most liquid?

The easy answer to this question is a checking account, but several other liquid bank accounts can provide you with your money as soon as you need it. Keep reading to learn what those accounts are, how to pick the best one for your money, and what a great financial strategy looks like.

What is Liquidity?

In simple terms, liquidity refers to how fast you can convert any asset to cash. A liquid account is one where you can withdraw your money quickly, at any time, without any restrictions, penalties, or fees. Another component of liquidity is whether you can convert an asset without losing its value. A car is one of the least liquid assets because it takes a while to sell, and you typically lose part of its value. In contrast, cash is the most liquid asset possible.

By this logic, the most liquid accounts are cash accounts, such as checking and savings accounts. For the most part, most checking accounts don’t have withdrawal limits, and your money doesn’t lose its value when you withdraw it. However, not every account can be considered a liquid account. For example, although you can consider certificate accounts liquid, they are one of the least liquid types of accounts because of the early withdrawal fee and penalties you may face from your financial institution.

Liquid accounts are an important part of a successful financial plan that helps you build wealth while maintaining a necessary money supply. Let’s talk about why that is.

Why are Liquid Accounts Important?

Liquid Accounts

Liquidity is important to cover everyday expenses as well as unexpected emergencies. It’s inconvenient to have to wait days to access your money or for your assets to convert to cash. The option would be to borrow money in the form of credit card debt or other loans, which puts a dent in your overall wealth in the form of high interest.

Here are some examples of the most liquid accounts:

  • Checking account: The most liquid account and typically the quickest place to access your cash.
  • Traditional savings account: Almost as liquid an option as checking accounts. Typically offer low yield and limits on certain transactions within the account and can be opened in-person at a bank or credit union or through an online bank.
  • Money market account: An interest-bearing account with debit card and checking features at a bank or credit union. Virtual banks and the ease of opening an online savings account have rendered money market accounts less popular in recent years.
  • Liquid stocks and bonds: Can be sold immediately for cash in a trade whenever the markets are open.
  • Mutual funds: Not the most liquid asset as you have to wait for the end of the trading day to sell, at which point your mutual fund might have lost its value.
  • Mobile payment services: This includes services such as PayPal and Venmo.

When choosing an account, there’s usually a tradeoff between liquidity and yield. So let’s now discuss what yield is.

What is Yield?

Yield is the earnings from an investment over a particular period, usually expressed by a percentage. Many times, financial institutions refer to an annual percentage yield.

The yield is determined by three main factors:

  • The invested amount.
  • Market value.
  • Face value of security.

You find yield on stocks, bonds, and other investment options. To calculate yield, take the net realized return and divide it by the principal amount. For certain investments, such as stocks, yield is calculated as the price increase plus dividends, then divided by the purchase price.

Yield is just as important as liquidity to a successful financial strategy.

Why is Yield Important?

Why is Yield Important

Although a liquid account is the least risky to keep your money, it shouldn’t be the only place you keep it. If your goal is to create a long-lasting financial plan, you must have some of your money in high-yield accounts.

For the most part, the more liquid the account, the lower the yield. This is great for the security of your short-term savings, but adding yield to your financial strategy is a crucial part of long-term finances.

That said, it is possible to have the best of both worlds, like a high yield savings account or deposit account that’s easily liquidated. For example, certain investments, such as a mutual fund or liquid stocks, bonds, and ETFs can provide you with higher returns.

Here are some high yield assets that are not easily liquidated:

  • Certificate accounts: Although you can liquidate a certificate account before maturity, you often face a hefty fee.
  • Real estate and land: The process of selling a property can typically take months, and you can potentially lose part of its value if forced to sell too soon, making real estate one of the least liquid assets.
  • Small business: Selling a small business is another process that takes months.
  • Gold, silver, and jewelry.
  • Physical collectibles.
  • Automobiles: Typically a depreciating asset.

Pros and Cons of Liquid Accounts

When thinking about which type of account is typically the most liquid, consider the benefits and drawbacks of keeping your money liquid.

The most obvious benefit of a liquid savings vehicle is accessibility. As an account holder, you have the comfort of knowing that you have access to your money when you need it without facing any hefty penalties or fees. This access can save you in situations when you need cash fast, like a sudden medical bill.

Keeping liquid accounts also means that you have money available whenever a new investment opportunity arises without selling your other investments. This gives you a method of continuing to grow your funds while keeping control of your money.

When you apply for a loan or a mortgage, liquid assets can increase your chances of being approved because they demonstrate that you have the discipline to save your money and manage it well. If you’re looking for a place to rent, showing that you have up to 6 months worth of expenses in a savings account improves your chances of getting approved for a lease.

Lastly, keeping your money in a liquid account is less risky than keeping it in any other type of account. At the time of an emergency, you can access this asset right away. What’s more, you don’t have to depend on the market to ensure that your liquid assets remain valuable. In the event of a market crash, the money in your liquid account remains safe.

At the same time, there are a few downsides to keeping your money in a liquid account, the most obvious being that your money doesn’t grow as much as in non-liquid form. For example, even though real estate can take weeks or even months to sell, the equity in your home can surpass the money you can make in a liquid account. The same goes for the tax benefits of adding money to a retirement account.

Liquid accounts have their pros and cons, and so do higher-risk non-liquid options. The best way to ensure financial stability and growth is by holding a mix of liquid and non-liquid assets.

The Perfect Compromise – Liquid and Yield Accounts

When figuring out which type of account is typically the most liquid, you must know how you want to use such accounts.

Keeping all of your cash and assets in liquid accounts isn’t the best way to ensure growth. On the other hand, you don’t want to risk all of your money in high-yield investments. In the event of a market crash, you may find yourself stuck for cash.

A fair compromise is to split your money between liquid and high yield accounts and assets as part of a proper financial plan for your future.

Real estate, stocks, tax-sheltered accounts such as a 401(k), or any other investments are a great way to ensure that your money continues to grow. It’s important to keep adding to your investments to see the most growth, but you must monitor them to make sure they are still working for you.

For example, it’s a good idea to hold three to six months’ worth of pay as a minimum balance in an emergency fund in case you lose your job or experience any other type of financial rough patch. This cash should be kept in an account that’s as liquid as possible, such as a savings account.

Better yet, keep your emergency fund in a high yield savings account so that you can make some interest off of it as well. If you don’t have enough for an emergency fund right now, look at your assets and determine if you have a high amount of non-liquid assets. It may be worth liquidating some of your current assets to establish a solid emergency fund.

Once you have an emergency fund in place, you can use your additional funds to invest in less-liquid assets, such as real estate, stocks, or a small business. One of the top investments you can make is adding money to a 401(k) plan or other retirement accounts. These accounts are generally not considered liquid as you’re limited in your ability to take out money except for medical bills. When you withdraw early from a retirement plan, you not only have to pay taxes on the money you withdraw, but you also face hefty penalties from the IRS.

Final Thoughts – The Importance of Liquid Accounts

The answer to which type of account is the most liquid is easy: a checking account. However, having a complete and healthy financial portfolio isn’t as simple as keeping a savings account.

To reach your longer-term financial goals, you need to have a combination of liquid and non-liquid assets as part of your portfolio. Start by establishing an emergency fund in a liquid account to keep a safety cushion and establish financial security.

Once you fund your emergency account, you can move on to adding money to investment accounts to fund your future and build lasting wealth.


Main Advantages and Disadvantages of High-Risk Loans – Our Guide

If you want to make a large purchase, such as a house or a car, chances are that you’ll seek a loan to cover the costs. If you have a few blemishes in your credit history, though, finding a lender to give you a loan can be challenging.

The good news is that even if you made a few credit mistakes in the past, there is still hope to secure a loan and attain your dream purchase. You would be considered a high-risk borrower and may therefore be eligible for high-risk personal loans.

Keep reading to learn more about high-risk personal loans, including whether or not you might be eligible for this type of loan and how you can secure one to finance your dreams!

What are High-Risk Loans?

It’s important to understand what a high-risk loan entails before beginning the process of pursuing one.

In short, a high-risk loan is a loan offered to those with a less than stellar credit history. High-risk loans are typically subprime loans, meaning that they are loans offered at a rate above prime to borrowers with low credit ratings. You may also see them called bad credit loans.

Typically, what indicates to lenders that you’re a high-risk borrower is a low credit score, because a low credit score suggests that:

  • You have a history of paying your bills late
  • You keep your credit card balance high and close to your limit
  • You have taken out a lot of credit or made requests for multiple loans in the past

One thing to know about a high-risk loan is that it’s an unsecured loan, which is where the risk lies for high-risk lenders. Unlike a secured loan, such as a mortgage which requires you to put your house up as collateral, high-risk loans don’t require you to put up any of your possessions if you fail to pay the loan back. So, the lender has no legal claim to your assets in the event of default and depends solely on your financial capacity to and trust that you will pay the loan back.

With so much risk for borrowers with a history of bad credit habits, you might be asking yourself: what’s in it for high-risk lenders? The answer is interest.

The way that a lender justifies giving a high-risk borrower a loan is by charging a high interest rate. The idea is that if you do end up not repaying the loan, the interest can cover some, if not all, of the lender’s loss. What’s more, borrowers may feel more incentivized to pay their loans back quickly to prevent high interest rates from engulfing their pockets.

Why Take Out a High-Risk Loans

Why Take Out a High-Risk Loan?

With such high interest rates, high-risk loans may seem like an unattractive option, but there are many situations where the borrower might benefit from a high-risk loan if they can pay back the full amount promptly.

Pay Off Your Other Debt

If you have multiple loans or credit cards with high interest, it may make sense to consolidate your debts.

Debt consolidation involves obtaining a new loan to pay off a series of smaller loans. You essentially use this new, larger loan to pay off several smaller ones, combining your debt into one and requiring you to make only one monthly payment.

There are several reasons to consolidate your debt:

  • Simplifying your debt repayment. You no longer have to remember several due dates, meaning that you let fewer payments slip through the cracks.
  • Reducing the interest rate. If you have high-interest debt, such as credit card debt, taking out another loan with even a slightly lower interest rate to pay off this debt may end up saving you time and money in the long run.
  • Paying off your debt faster. If you end up with a lower interest rate than you had while keeping the same payment amount and schedule, chances are that you’ll end up paying your debt off a lot faster.

It’s important to note that a high-risk loan might not be the best way to consolidate your debt. The interest rate of a high-risk loan may end up being higher than the interest rates for your other loans, which doesn’t benefit you in the long run.

Increase Credit Score

One of the best reasons to say yes to a high-risk loan is to start rebuilding your credit.

Taking out another loan to increase your credit score may sound counterintuitive, and your score may indeed take an initial hit once approved for your high-interest loan. However, a new loan allows you to show that you’re capable of paying down your debt on time.

If you continue to pay off your high-risk loan on time every month, you will demonstrate consistency and see your credit score increase. Better yet, try to pay more than the minimum amount to pay down your loan quicker and prove that your past money mistakes don’t define you today.

Now that you know how high-risk loans may benefit you, you need to determine if you’re eligible for one.

What You Need for High-Risk Loans

Applying for a high-risk loan is as simple as applying for a credit card or any other type of loan. You can do it by contacting any conventional lender, such as your local bank or credit union. In some instances, you can even complete an online application. You need your personal information and some additional documents.

However, considering the stakes of high-risk loans, lenders sometimes require many steps and several components to be included in your application. If you have a bad credit score, the application process can be more complicated.

Here’s what you typically need to qualify for a high-risk loan.

Credit Score

The most important aspect of determining your eligibility for a high-risk loan is your credit score.

Sure, lenders already assume that you have a low credit score if you’re applying for a high-risk loan, but just like any other loan, exactly how low that score is determines how much you can qualify for, if at all.

Some high-risk lenders do have cut-off points when it comes to credit scores. For example, if your credit score is below 500, you generally have a lot more trouble securing a loan, even a high-risk loan.

Even if you do qualify for a high-risk loan with a credit score below 500, the loan may most likely be a small amount with an extremely high-interest rate that might not even be worth it in the long run.

Be sure to look at your credit score and review your credit report before applying for a high-risk loan to understand where you stand. Any high-risk lender will do their own credit check before approving the loan, but you should still gather your own information to determine if you have poor credit.

Proof of Income

No matter what type of loan you take out, lenders want to know that you can pay back the loan and have evidence of how you’ll be paying it back, which is why you need to provide proof of income.

Proof of income is a key part of your high-risk personal loan application. It proves to lenders that you have an adequate income to pay back the installment loan consistently and on time. Whether you’re employed full-time with a stable income or receive some other type of payments (i.e., pension), you need to prove that you have money coming in.

Along with proving that you have sufficient funds to cover paying back the loan, proof of income also gives lenders an idea of your debt-to-income ratio, which is the percentage of your income that will go towards paying down your debt. You can calculate your debt-to-income ratio by adding up how much you pay in monthly debts and dividing it by your income before taxes or gross monthly income. What you’re left with is a percentage, your debt-to-income ratio.

The ideal debt-to-income ratio for lenders typically hovers around 30%. However, for high-risk borrowers who may typically have a higher debt to income ratio, a lender may offer a little bit of leeway in terms of the acceptable percentage.

If your income alone isn’t enough to get you approved for a high-risk loan, consider asking someone to be your cosigner. In the eyes of the lender, a cosigner is someone who would approve all risks if you fail to pay your loan, meaning that they become responsible for your payments. For best results, your cosigner should be someone who has a stable income and a good credit score to compensate for your high-risk profile.


Just because you’re approved for a loan doesn’t mean that you can afford to pay it back. These circumstances could be why you ended up in need of a high-risk loan in the first place!

It’s important to determine whether or not you’ll be able to keep up the payments when paying back your high-risk loans. To best prepare, pay special attention to the interest rate you agree to and estimate how much your monthly payments will be.

Speak to an Expert

Since every loan you apply for triggers a hard inquiry into your credit – which can negatively impact your credit – do all of your research before jumping into an application.

Start by looking at your local banks and credit unions to determine where you may find the best rate, then compare rates and find out each institution’s requirements for high-risk loan applications. It’s a good idea to contact them or another financial expert to discuss your options.

When you’re ready to apply, be sure to gather all of the relevant information for your application to make the process go smoother. This information may include:

  • Credit report (although this is usually pulled by the lender, it’s still a good idea to have it on hand).
  • Proof of income (paystubs, W-4 forms, letter of employment).
  • A cosigner, if applicable.

Pros and Cons of High-Risk Loans

Pros and Cons of High-Risk Loans

As mentioned, high-risk loans have their advantages to obtaining funds and improving your credit. The benefits of high-risk loans include:

  • Accessing a loan while carrying a low credit score.
  • Obtaining a personal loan to purchase something now instead of waiting.
  • Consolidating your debt for simpler payments.
  • Increasing your credit score with a new lender willing to give you a chance.

That said, there are still a few drawbacks to pursuing a high-risk loan, such as:

  • Obtaining additional debt.
  • The responsibility of having to pay back the loan on time.
  • Higher interest rates.
  • The potential necessity of a cosigner.

When determining whether a high-risk loan is the best option for you, consider each of these pros and cons to determine if you can keep up with payments or if this type of loan really will benefit you in the long run.

High-Risk Loans – Final Thoughts

High-risk loans can open up opportunities for those who have made financial mistakes in the past and just need a second chance.

Applying for a high-risk personal loan through a traditional lender can be as simple as applying for a credit card, but make sure you can handle a loan with such a high interest rate, especially if you’ve made poor financial decisions in the past and have a less-than-stellar credit rating.


What is a Consumer Loan and How Do They Work?

What is a Consumer Loan

Most adults will need a number of consumer loans throughout their lifetimes, even those who are considered wealthy. Few people have enough cash on hand to buy cars or homes outright; most of us need to work with a financial institution or lenders in order to pay for big purchases.

Consumer loans are a massive part of the financial industry in the U.S., and when managed properly they enable us to provide for our families—a loan may quite literally “put a roof over your head.” It can be a huge relief to see some money hit your checking account in a time of need.

However, consumers should proceed with caution! Loans can also be extremely tricky to manage, especially for those with little financial know-how or budgeting skills.

This is why it is important for borrowers to have a general understanding of how consumer loans work before they apply for loans and make agreements with lenders. In this article, we will walk you through the four main types of consumer loans and how they work.

Auto Loans

Whether you are searching for a used car on a modest budget or seeking a flashy sports car after a big promotion at work, auto loans are needed by most consumers to purchase cars.

The loan term for an auto loan is one of the most important things to understand, and it relates directly to the value of a car. While a home’s value will in most cases increase over time, an automobile’s value will generally decline over time.

This starts the minute you drive off the dealer’s lot. That’s why car loans have shorter loan rates.  The lender needs to know the car will be enough to cover their losses if you default on your loan.

These terms usually last anywhere from 24 to 84 months, and it is best for borrowers to bring a down payment to the table whenever possible to cut down on that loan term.

Unfortunately, some consumers will find themselves “upside-down” in a car loan, meaning they still owe more in loan payments than the car is worth. (This is often due to these loans’ fixed interest rate,  jacking up the price of your monthly payment.)

Taking the shortest repayment plan is advisable when it comes to car loans, and it is also worth trying to wait it out until you can save a considerable down payment. If public transportation is an option that could buy you six more months of savings, it could pay off for you in the long run with a much better auto loan.

Mortgage Loans

A mortgage loan is another way to purchase a big-ticket item–in this case a house–without having to fork over hundreds of thousands of dollars (or in some cases millions) to the seller.

Few people would ever be able to purchase a home without a mortgage, and they certainly would not be able to buy the “home of their dreams.” Mortgages allow us to pay for our homes over time, though of course, they come with some limits.

If you are making $15 an hour as a barista, no lender is going to willingly enter into a $750,000 mortgage with you.

Luckily there are mortgage programs designed to assist with home purchases for those in lower-income brackets. The main types of mortgages are:

Conventional Mortgages: These work well for consumers who are able to make a significant down payment on a home (preferably 20%).

FHA Loans: These are backed by the Federal Housing Administration and target low-income home buyers.

VA Loans: These are offered by the Department of Veterans Affairs to assist veterans in purchasing homes.

Most mortgages work as 30-year fixed-rate loans, meaning the consumer pays in monthly installments over the course of 30 years. Some 15 or 20-year mortgages do exist, but these are less common as the monthly payments are much higher and not feasible for as many borrowers.

People and Dog Sitting on Floor

While your monthly payment remains the same, what differs over time is how it is divided between interest (how the lender makes money) and principal (the original debt).

This process is called amortization, and at the beginning of your loan more of your payment will go toward interest and this will decrease over time.

Personal Loans

While home and auto loans are used widely, there are a variety of other reasons we may need funding. This is where personal loans come into the picture.

A personal loan can help a consumer pay for anything from financing a vacation to medical expenses to debt consolidation. Personal loans vary widely in terms of maximum loan amounts, interest rates, and the length of the loan.

Personal loans can be taken from most financial institutions, or common payday loan centers. The process is often as simple as filling out a consumer loan application to submit to a loan officer for approval.

Generally speaking, most lenders will cap a personal loan at $100,000, and again the limits will be specific to the borrower and their consumer credit report history and income. Personal loans are often helpful when life throws unexpected expenses our way, such as a sudden illness, a layoff, a divorce, or other challenging circumstances.

Student Loans

The cost of higher education can be crippling for many families; very few can afford to pay for four years of college outright, without some form of financial aid, scholarships, or student loans.

Federal student loan programs offer a fixed rate and the government pays the interest on the loan while the student is still enrolled in school. There are subsidized federal loans, which go to those students with the direst need, and there are also unsubsidized loans that can be used by students without stipulations on need.

A student may borrow up to $23,000 in unsubsidized federal loans (and up to $31,000 including subsidized), with the assurance that every borrower receives the same interest rate.

While these are popular programs, these amounts do not add up to enough funding for many students, with tuition costs constantly rising at colleges and universities across the country.

Private lenders also work with students who need a credit line for their education, and the interest rates will be dependent on that borrower’s financial situation.

Man in Library

A Final Tip on Consumer Loans

No matter what type of consumer loan you are seeking, be sure you read the fine print carefully and familiarize yourself with all penalties and fees before signing the dotted line.

Loans can be lifesavers, but they can also wreak havoc on your credit score if you enter into one that you cannot repay.


The 3 Types of Credit and Why You May Want All of Them

Credit Card

When consumers think of credit, the first thing that comes to mind is usually a credit card. After all, approximately 70% of American households have a least one credit card, and most of us are accustomed to using them to cover some portion of our expenses.

Americans charge everything from modest grocery trips to tropical cruises on credit cards. Plus, having a solid credit history and credit score has become a necessity in the world today.

However, “credit” and “credit card” are not interchangeable terms, and there are several different types of credit you may be using already, even if you do not think of these obligations as credit.

Your mortgage payment, car payment, and even your utilities are all forms of credit, and we will explain how they are categorized. We will also look at how the three types of credit play into your credit score and why the mix of credit is important for that score.

Installment Credit

Honda Car

Even if you cannot define installment credit offhand, chances are you are currently paying for something in an installment credit plan or you will have an installment loan in the future.

Installment credit works like this:

– You borrow a set amount of funding from a lender.
– You agree to a fixed monthly installment (or payment) that you will make in order to pay off the debt in a specific timeframe.
– If you make the installment payment every month during that time frame, you have paid off the loan in full at the end of the term.

The monthly installment will include a set interest rate you are paying the lender (remember: this is how they make money). In the case of a car loan (which is one of the most common types of installment credit plans), you may be in a scenario where you agree to:

– Borrow funds to purchase a $25,000 car.
– Pay a monthly installment of $475 to the lender.
– Pay those installments for each of 60 months, in order to pay for the loan in full in a five-year term.

Some quick math will tell you that $475 x 60 months = $28,500. The extra $3,500 you pay over the term of the loan is the interest for the lender.

Some borrowers are eager to pay off installment credit plans early, which on the face of it seems like a wise thing to do, especially when a shorter timeframe means less interest.

However, this is one scenario where we are reminded how important the “fine print” is when it comes to any credit agreement. Some lenders have penalties for paying an installment credit plan off before the end of the term.

Those penalties, and the resulting fees, could cancel out the interest payments you saved. Be sure you double-check your specific installment credit plan before paying early.

Revolving Credit

Hands Money Palm Trifle Coins

When dining with a group of friends and feeling particularly generous, few individuals say “I’ll take the bill and cover it with my revolving credit.” But that is indeed the type of plan you are using if you decide to pay for the group’s meal on a credit card.

Revolving credit plans are most often associated with credit cards, and they are also used with personal lines of credit and home equity lines of credit. There are many different kinds of credit cards offered by credit card companies today, from a rewards credit card to a student credit card, to a business credit card. While these different cards hold different perks and use they generally work like this:

– The borrower is given a maximum credit line (the total amount of money she can borrow).
– When the borrower utilizes that credit, in any amount up to and including the maximum, the creditor determines a minimum payment owed.
– The borrower could pay the amount owed in full, or the minimum monthly payments, or a number in between.
– If the borrower carries a balance to the next minimum monthly payment, she will pay accrued interest and fees.

Revolving credit lines can be the most difficult for individuals to manage, with the temptation to outspend what you earn leading many into credit card debt.

That splurge to cover the group’s $800 meal may be completely impractical for someone who brings home $3,000 a month and needs every penny of that to cover rent, utilities, bills, and groceries.

A revolving credit line can make someone believe she has an extra $800 to spend once a creditor offers a $5,000 limit. The key to revolving credit plans is to pay the balance in full every month, whenever possible.

It is also important for credit card users to remember that a $50 blouse can easily turn into a $100 blouse if you put it on a credit card where you are not paying the balance in full.

The high-interest rates associated with credit cards are killers when it comes to staying on a budget and living within your means. It’s important to shop for a lower interest rate for your card before you sign up.

Open Credit

Here is where we clear up another common point of confusion among borrowers: “charge cards” are not the same thing as credit cards. Charge cards are a type of open credit, where the borrower agrees to pay a lump sum, and the charge must be paid in full to avoid penalties or cancellation.

A charge card does not always have a set limit; so, for example, if you have a good credit score you may be able to charge a $10,000 watch on this card. But you also have to pay it off in full when the bill is due the next month, so you must have the funds to cover your luxurious new timepiece.

Utilities work in an open credit system as well. In the same way, you can use a charge card for goods that you pay in full when the bill is due, a utility company offers you services (in advance) that you pay in full when the bill is due.

Credit Mix and Credit Scores

Payment with Visa Card

Credit mix is a factor in your credit score because it shows lenders you are able to handle a variety of financial obligations successfully. Having only one credit card, for example, does not give lenders a sense of your ability to juggle financial priorities.

The credit “mix” category accounts for 10% of your credit score. Factors such as payment history carry much more weight, with 35% of your score, but this does not mean you should ignore credit mix as a way to improve your score when you manage different types of accounts successfully.

The most important thing to remember is that you should only manage a mix of accounts you can truly afford. It is down to you to read all the fine print associated with any credit type to avoid steep penalties and fees and stick to a personal budget that ensures you can pay your bills on time, every time.


How Long Does It Take to Get a Loan? Our Simple Guide

How Long Does It Take for a Loan

When it comes to needing a personal loan, most people need them quickly. If you are facing an unexpected expense that you cannot cover with savings, you need access to funds without delays caused by a tedious loan application process or an unnecessarily long review period from the lender.

There are many different kinds of loans that take time. It’s not often possible to secure a student loan (even a private student loan) or business loan in a short period of time.

However, when it comes to a private loan or personal loan, these can be wrapped up in a matter of days, if not the same day. For borrowers with good credit, the loan approval process will likely take less time than for those who have less than stellar credit scores. Still, even applicants with credit issues can move through the loan process quickly.

Any of us can find ourselves in need of a loan when life throws unexpected curveballs our way. We may need a short-term loan to cover medical bills, a car loan to purchase a new car, or to keep a household afloat after a layoff.

Loans can be secured quickly and managed easily if you understand the basics involved, and we will walk you through that process here.

Waiting for Cash Credited to Bank

Two Ways to Get Your Loan

As we review the ins and outs of the loan application process, we will look at the timing associated with two different types of lenders: online lenders and banks/credit unions.

There are some general assumptions related to the way each of these categories works, though it is still advised to ask each specific lender for their timeline before you get started.

Working With Online Lenders for Personal Loans

One popular option for loans is the use of an online lender. Most of us are accustomed to managing so many aspects of our lives through online platforms, whether that means taking college courses, filing our taxes, or designing a plan for a backyard patio.

Online lenders are a convenient resource for those pressed for time, as you can apply for loan funds any time of night or day. The ability to “shop” the lenders online is also helpful, as you can search for consumer reviews and read up on what other people have experienced using a particular lender.

Laptop Beside Hour Glass

The timing will vary from lender to lender, but the basic time frame you can expect is as follows:

Application: The online lender application will take just seconds or minutes to complete for a preapproval. Essentially you are offering your social security number and income for a preliminary rate quote.

Many consumers are cautious about sharing a social security number and other personal details online, and rightfully so. This is why you should take some time to research and verify any personal loan lenders, making sure their site is secure, before sharing any details,

Time Between Application and Approval: If you get a preliminary rate quote from an online lender and wish to move forward, it will take another three to five days for final approval.

Lenders will be taking a closer look at your financial history to determine if they want to assume the risk of offering you a loan. This will involve a detailed look at your credit score and history as well as any other information submitted with your application.

Time Between Approval and Funding: Go ahead and bank on a few more business days before the fund hits your bank. This could be impacted by bank holidays as well, so be sure to confirm with both the lender and your bank.

It would be ill-advised to write the rent check or pay off any debts until you see that the funds have definitely hit your account.

From the time you apply with an online vendor, you could have funding within a few days at best, or it could be up to 10 days or more as you work out the loan term on your funds.

Working with Banks or Credit Unions for Personal Loans

While the convenience of online lenders is a big draw for some borrowers, there is also a significant benefit when it comes to taking the traditional route with banks and credit unions. Nothing compares to in-person customer service.

Building with Glass Windows

By working with a bank or credit union, you can go in and speak directly to a loan officer about your specific needs. This is a great opportunity to review all of the “fine print” associated with loans, and you will have an opportunity to ask for clarification on the loan type, interest, fees, penalties, repayment term, and more.

Best of all, if you use a bank or credit union where you already have a checking account or savings account, you may be able to negotiate better rates. It is also convenient to keep your loan account tied to your checkings and savings, for ease of having things in one central place.

When you log on to your bank’s mobile app, you will have a quick snapshot of your financial situation.

The timing associated with a personal loan from a bank or credit union will typically play out as follows:

Application: The loan application may be filled out in the bank or ahead of time online; check with them first to ensure you have all the right documentation if you are going to fill it out in person.

Time Between Application and Approval: With banks and credit unions it is possible you can get approved on the same day or within one business day. This will depend on their staff available to check all of the information in your application.

Time Between Approval and Funding: If you are already a customer of the bank or credit union and your loan application is accepted, there is a very good chance the funding will be in your account on the same day. In some cases, it may take 1-2 more days.

Final Thoughts on the Time It Takes to Get a Loan

The online lending process is convenient and a good option for those who can wait a week or more for funding. For personal loans with more urgency attached, it is a better idea to apply with a bank or credit union.


Four Tips to Help You Manage Long Term Personal Loans

Manage Long Term Personal Loans

A personal loan can provide tremendous relief when facing burdens such as unexpected medical expenses, a job loss, a divorce, or any number of circumstances. If your loan application is successful, you may find yourself finally able to exhale after a long period of stress and worry.

Whether it’s a short term loan, unsecured loan, installment loan, business loan, or any other kind of loan, getting this kind of financial help can be a huge relief.

However, that “exhale” should also be a turning point, one where you immediately begin to put a plan in place to pay the loan back. The management of a personal loan requires commitment from the borrower, and no one else is going to do this work for you.

Unfortunately, those who fail to properly manage personal loans, especially a long term personal loan, end up facing negative consequences.

A bad credit score, an inability to secure additional loans, and possibly the loss of assets as you figure out a plan for repayment can be difficult to handle.

The last thing you want as a result of a personal loan is an even worse financial situation. We have the tips you need to successfully manage a long term personal loan and regain your financial footing once and for all.

Start with a Budget

Many people find themselves in financial distress because they do not have a budget. This is the easiest way to get into credit card debt or other financial woes is to spend more than you make.

It’s important to keep tabs on the money coming in and out of your bank account, especially if you’re also managing student loans, credit cards, or other forms of loan repayment.

Sit down and write out all of your expenses, including an estimate for those you do not know offhand. Your rent, car payments, student loan payments, credit card payments, and utilities should be easy enough to pull from previous bills, and you can use a placeholder amount for food, activities, and entertainment.

Track those items to the penny over the next month, keeping up with what you spend on those categories. You may be shocked to realize your smoothie habit is draining an extra $100 out of your bank account.

This is where you trim the fat to create the funds to cover your long term loan. This can help you make a plan to hit every monthly payment, and build your way back to excellent credit.

Budgeting does not come easy for everyone, and fortunately, there are loads of helpful apps to choose from to keep you on track. Starting a household budget is one of the best things you can do not only to pay back your personal loan but also to stay in better financial shape going forward.

Person Holding with Samsung Galaxy Tab

Pay More Than You Can…On Time

Paying on time, each and every time is the name of the game when it comes to loans if you do not want to damage your credit score. This is why a budget is incredibly important, so you do not find yourself short of money when the bills are due because you overspent.

In an ideal scenario, you will also try to pay extra on the loan whenever possible. Paying early and paying extra will bring you significant benefits, such as

– A shorter loan repayment term overall (meaning less interest paid over time)
– The financial freedom to use that money in other ways once you have paid your debt
– An improved credit score and credit history if lenders report you always paid on time

Paying early is in many cases one of the best things you can do, but we must flag one very important warning here. Some lenders have a penalty for paying off a loan before it is due, and this is the “fine print” you need to review carefully before entering into any loan agreement.

Dane County Credit Union never charges an early pay-off fee, but if your loan is with another lender check out your loan term before you make a repayment plan. It is possible in these scenarios that your hard work to pay extra is completely negated by penalty fees like prepayment penalty. This is where you need to know your loan, inside and out, so you can make the best decisions about when to pay it off in your repayment period.

Even if paying “extra” is problematic, rest assured paying “on time” is never a bad thing. That is something you should live by as a rule set in stone.

Woman Using Drawing Pad


If you are managing multiple loans, a new loan option can come in the form of consolidating them. For many borrowers there comes a point where it seems impossible to pay back all of the debts, and they fail to make the minimum payment on any single loan.

A higher interest rate can catch you off guard, which is why looking at a loan’s annual percentage rate is so important. Debt consolidation offers a way for you to combine the loans into one monthly bill, paying them off at a potentially lower interest rate, or even a fixed rate.

The good news for many borrowers is that it is possible to lock in an interest rate in debt consolidation that is lower than the average interest rate on your loans. The “bad news” is that you will lose out on a longer repayment term, and have a shorter amount of time to pay back the debt.

If you can revisit your budget and continue to trim some fat to pay the monthly debt consolidation bill, you may find this is the best possible solution for you to get your financial house back in order.

Monitor Your Credit Score

Some consumers only worry about their credit scores when it is time to take out a new loan, perhaps when purchasing their first home or car.  But you should be monitoring this score regularly to ensure that your efforts to pay down your debts are reflected in your score.

By making on-time payments on your personal loans, you should see a positive impact on your credit score. If you miss payments, you can be sure the credit score will go down. A steady and consistently good score is what you want to position yourself for the best possible loans in the future, if and when they are needed.


Personal Loans: Final Thoughts

Managing personal loans requires organization, dedication, and commitment. If you can establish and stick to a budget, it will help you not only pay off the loan but also be in a position to better manage your finances going forward.

Enter into any personal loan agreement with a clear head and a clear plan for paying it back, and be sure you have combed through all of the fine print first to avoid getting hit with fees and penalties you may have missed.


Crunching the Numbers: Comparing Car Loans Before You Buy

If you’re in the market for a car loan, it’s essential to understand your options. From deposit amounts and loan terms to interest rates and fees, lots of factors can influence the availability and costs associated with auto loans. Whether you’re purchasing a new car from a vendor or buying a second-hand vehicle in a private sale, making smart decisions from the outset will help you to save money down the road.

Let’s look at car loans in the United States and how to compare numbers and options to ensure a great deal.

What are car loans and how do they work?

For most people, buying a car is a huge purchase decision that involves borrowing money. A car loan is a simple arrangement between one party who acts as the borrower and another party who acts as the lender. You borrow money in order to buy the car and enter into an agreement to pay back the funds over a set period of time. Along with the initial capital, the vast majority of loans involve interest, which is the price you pay for loan access. Most loans also involve fees, including one-off fees when the agreement is signed and ongoing fees throughout the loan term.

Key components of a car loan

While auto loans are simple in theory, making the wrong decision can be costly and hard to reverse. Before you take out a car loan, it’s important to understand the following elements:

  • Down payment – This is an initial payment made at the start of a loan agreement. While this upfront cost is not part of every loan arrangement, it is extremely common. A down payment is typically 20% or more of the car’s loan value, paid in cash as a vehicle trade-in or a combination of both.
  • Interest rate – This represents the ongoing cost of getting a loan, and this amount needs to be paid back to the lender in addition to the value of the car. The higher the interest rate, the more expensive the loan. When it is called the annual percentage rate (APR), it also includes ongoing fees as a yearly percentage.
  • Loan term – Also known as the loan duration, this is the time it takes to pay back your loan. There is a clear relationship between the loan term, monthly payments, and interest. While a longer loan term means lower monthly payments, you will end up paying more money in interest over time.
  • Principal vs. total cost – The principal is the amount that you borrow minus interest, fees, and other costs. The total cost is the total loan amount over time, including the value of the car and the price you pay for borrowing money. When comparing loans, the total cost is a more accurate indicator of the real cost.

Who issues car loans?

In the United States, car loans are available from multiple parties, with pros and cons associated with different providers and their products. Finding the right lender for your individual situation is central to every good arrangement. Most lenders can be split up into the following four categories:

  • Family and friends – You may be able to borrow money directly from your friends or family members. While this is not always possible, it does provide a number of advantages over commercial loan arrangements. Borrowing funds from people you know is often cheaper due to a lack of interest payments, and loans can be more accessible because down payments are not always required. However, borrowing from friends and family can lead to relationship problems.
  • Dealerships – Commercial vendors may offer dealership financing, among other options. Depending on their size and location, car yards may have existing relationships with multiple lenders. While this can make it easy to obtain finance, going down this road can be expensive and risky. You should try to avoid “buy here, pay here” offers aimed at people with bad credit or no credit history, as they often involve high interest rates and fees.

  • Mainstream banks and credit unions – Direct lending is available from traditional banks and credit unions, and it provides a number of advantages. Big banks and credit unions lend money every day, most of which are in a great position to offer competitive interest rates and fees. However, flexibility is not their strong suit, which can be a major disadvantage to anyone with a compromised credit history.
  • Community-based financial institutions – Smaller credit unions and community-based financial institutions are a great option for most people, where easy loan access is combined with competitive interest rates and low fee structures. Some smaller lenders have specific programs for people with bad credit scores or no credit history whatsoever. While the interest rates on offer are not always as low as mainstream banks, there are plenty of great deals available.

How to crunch numbers and compare car loans

Once you understand the basic elements of a car loan, you can start to compare loans based on the information available. Regardless of the service you use, car loans are typically paid back in monthly installments over the term of the loan. Your chief consideration as a potential borrower is to balance out the loan term with the interest paid over time in order to set up the ideal monthly payment structure for your needs.

  • Longer-term loans are likely to make your monthly payments lower — at the expense of higher interest payments and a greater total cost over time.
  • Shorter-term loans are likely to make your monthly payments higher — with the advantage of lower interest payments and a lower total cost over time.

Like many things in life, you need to weigh up short-term and long-term pain to find the best solution for your lifestyle. It’s not quite that simple, however, as interest rates also play a very significant role. Interest rates are set as a percentage term, functioning independently regardless of the term of the loan. For example, if you have a 5% interest rate, you pay that much interest regardless of the loan term.

  • Higher interest rates make your monthly payments higher, which leads to a greater total cost over time.
  • Lower interest rates make your monthly payments lower, which leads to a smaller total cost over time.

When you understand these details, comparing car loans can be easier than you think. With the following four elements, you can work out how much your loan will be and what you need to pay back each month.

  • The cost of the car
  • The down payment amount
  • The term of the loan
  • The interest rate

When you subtract the down payment from the cost of the car, you have the total cost of the loan. When you divide this amount by the term of the loan, you have the principal payment per month. When you multiply this amount with the interest rate, you have the final payment per month, which is what you need to budget for each month over the term of the loan.

Information you need before applying for an auto loan

In order to get a car loan, you’ll need to provide lenders with some information. While you need to complete a loan application, and lots of paperwork is involved, this process is relatively straightforward. Basically, the entity lending you money wants to get an accurate overview of your current financial situation and history. They need to know how much you can be trusted with and how likely you are to make repayments in the designated time period.

In order to check your current financial health, they will look at your employment records and bank statements to balance your income with your debt. In order to check your financial history, they will review your credit score and possibly look at past debt arrangements and records.

In most situations, you’ll need the following information during the application process:

  • Personal identification
  • Social Security number
  • Address — current and past
  • Bank statements
  • Employment income and data — current and past
  • Debt records and information

Auto loans by credit score

Once potential lenders have the information they need, they will start the approval process by checking your credit score and history. Your credit score is affected by open accounts, total debt levels, and historical repayment data. This simple three-digit number is produced by multiple credit reporting bureaus, with two primary credit score systems used in the United States and three prominent credit agencies.

  • Fair Isaac Corporation (FICO) produces the most popular score. This proprietary model pulls data from a number of agencies and situations.
  • VantageScore is a widely used alternative model, which uses data from three credit reporting agencies: Experian, Equifax, and Transunion.

Your credit score is based on a detailed analysis of your borrowing history and credit files, from mortgages and personal loans to utility and cellphone accounts. This score is used whenever someone is thinking about lending you money, from banks and financial institutions to utility companies and retail stores.

In the United States, your credit score is a number between 300 and 850. The following levels are typically applied to auto loans:

  • Superprime credit: 780-850
  • Prime credit: 660-779
  • Nonprime credit: 600-659
  • Subprime credit: 500-599
  • Deep subprime credit: 300-499

It’s important to note that your credit score can affect both loan access and loan conditions. For example, people with a higher score are more likely to be approved for specific car loans and to be offered lower interest rates in equal conditions. 

It’s also important to note that the application process itself can have an impact on your credit score. In most cases, the lender will pull a hard inquiry on your credit, which can cause a small dip in your score.

How do you get pre-qualified for an auto loan?

Before you get approved for a car loan, you can ask to be accepted for pre-qualification. While not a guarantee of approval, this initial offer does provide you with an agreed loan amount and interest rate. Pre-qualification is useful before you start shopping around for a car, as it gives you confidence and provides a bargaining chip at the dealership. In most situations, pre-qualification involves a soft pull of your credit, which means it won’t affect your credit score.

Interest rates for car loans in 2021

Collectively, interest rates change all the time based on the current federal reserve interest rate, the competitive banking environment, and wider economic conditions. On an individual basis, different rates are available based on the type of loan, the type of car, the loan term, and the individual lender. For example, loans for newer cars tend to have lower interest rates, as they carry a lower risk.

According to Experian’s State of the Automotive Finance Market, based on data from the first quarter of 2021, the average car loan interest rate was 4.09% for a new car and 8.66% for a used car. Credit scores can change things dramatically in terms of both loan availability and interest rate offers. For example, APRs can get down to as low as 2.34% for a new car and superprime credit score. On the other side of the coin, they can reach above 20% for a used car and deep subprime credit score.

The DCCU difference

DCCU is a trusted community-based lender offering competitive car loans to people in Madison and the surrounding area. We are 100% committed to the economic and social well-being of our members, so you can rely on honest advice, low fees, and great rates. We proudly help people from a range of socioeconomic backgrounds to overcome the challenges of car ownership. 

DCCU is owned by our members, with our financial cooperative dedicated to “building lifetime relationships through personalized financial service.” Along with easy loan access and great rates, we provide extended warranty protection and auto loan pre-qualification. We serve people in Madison and the surrounding counties of Dane, Columbia, Dodge, Jefferson, Rock, Green, Iowa, and Sauk.

If you want a car loan from a caring community-based lender, please contact DCCU today.



What is a Good Credit Score to Buy a Car – Here’s The Answer

Credit Score for Car Loan

When shopping for a new (or new to you) car, it is easy to get caught up in the excitement of four new wheels on the open road.

Perhaps you are looking at the convertible you have always dreamed of owning, or maybe you are simply upgrading your minivan after two toddlers wreaked havoc on your first one.

Car shoppers are easily excited by the latest bells and whistles on autos, and we fall quickly for things like heated seats, satellite radio, and even an overabundance of cup holders (you can never have too many cup holders).

In all of this excitement, it is easy to lose sight of the hurdles we may face when it comes to securing the loan for the car, whether that is through dealership financing, an auto lender, or a bank loan.

The dreams of putting the top down and cruising on a sunny day can quickly be squashed by the weight of a rejected or impractical loan, and in many cases that result could be down to your credit score.

A good credit score is an important factor in an auto loan. But how do you determine if you have excellent credit, poor credit, or a more average credit score? Here, we will explore just how good that score needs to be to make a car loan feasible.

How Does Credit Scoring Work?

If you are shopping for a car you should be familiar with how credit reporting and credit scores work, as well as your current credit rating.

There are tons of credit reporting agency options on the market today where you can find your score. If you do not currently have it, you can get a credit report for free at

Your fico score (aka a credit score) is divided into five categories:

300-579: Very Poor

Borrowers in this range are typically rejected by lenders. In the chance that they are approved, they will likely secure bad credit auto loans, and be required to pay some type of initial fee, a higher interest rate, or an upfront deposit to secure a loan.

580-669: Fair

Borrowers who fall into this category may also be referred to as  a“subprime borrower.”

670-739: Good

In this range, borrowers are more likely to be approved for loans, but not always at the best loan term rates.

740-799: Very Good

This category finds borrowers receiving much better interest rates on loans.

800-850: Exceptional

This is the ideal scenario for a borrower (and a lender, too, who has great assurance the money will be paid back). Here, you are considered a prime borrower, or a super-prime borrower.

Now that you know how the scores are viewed by lenders, you are probably wondering: “Which category do I need to be in to get a car loan?”

What Credit Score Do You Need to Buy a Car?

There is no one size fits all answer to this question as lenders do not all operate the same way. What is certain, however, is that those with a lower credit score will get higher interest and fees in whatever loan they secure.

Credit scores below 580 mean you are unlikely to get a reasonable loan; if your loan application is accepted by a lender, it will be subprime with extremely high-interest rates. It can be frustrating dealing with a bad credit car loan due to your credit score range.

Those in the lowest credit tiers are not the only ones challenged by the car loan process. Even those with a higher credit score can end up with interest rates that are often double what the best credit scores receive. While it may be possible to buy a car with any credit score, there is an ideal range you would want to be in if possible.

Credit Cards in Hand

What is the Ideal Credit Score When Buying a Car?

If you want the best possible financing arrangement when purchasing a new vehicle, the ideal credit score is 700 or higher. The closer you are to 850, the better the offer from the lender.

To put this in perspective, only 20% of the population is in the 800-or-higher range when it comes to credit scores. The majority of car buyers fall below the 800 range, though the ones with scores between 700 and 800 are still in a fairly good position.

Lenders see these buyers with higher scores as prime borrowers, meaning the credit score reflects the likelihood the borrower will make loan payments on time and pay off the debt in full. There is less risk for a lender to offer auto financing to a consumer with a credit score of 775 than there is with a score of 600.

I Have Bad Credit: Does This Mean I Cannot Buy a Car?

Bad credit will not stop you entirely from purchasing a car, but it will not make it any easier. You are going to have a hard time negotiating if you are already going in with bad credit, and the loan you may be offered will be subprime.

On the other hand, lenders expect to have a percentage of subprime borrowers, and they know that even with the risk involved this is where the real money is made on their end—on high-interest loans.

Therefore, even as a buyer with bad credit, you can feel assured you still have a decent shot at securing car financing. Then it is up to you to make sure you can meet the loan obligations by making your monthly car payment so your credit score doesn’t get worse.

Key Car in Hand

If you have a bad credit score and also need a car, you should weigh out every possible option before jumping into a high-interest loan.

Could you utilize public transportation for a period of time while working to improve your credit score?

Could you wait until you have saved up $5,000 or more for a down payment?

Could you have a family member co-sign the loan to reduce the monthly payment interest rates?

These are just some of the alternatives to consider to try and regain some financial footing that will ultimately help you improve your credit score.

In an ideal world, you will only sign on to a car loan once you have gotten your credit score up. However, if you absolutely need the loan now, look for a smaller bank or credit union for personalized service and an opportunity to discuss your specific scenario with a lender.


Credit Scores and Auto Loans — The Good, the Fair, and the Bad

Are you shopping around for a new car? Are you worried that your credit score will affect your borrowing options? A credit score is a simple number assigned to each person by one or more recognized credit bureaus. When you apply for a car loan or attempt to access any other kind of credit, this score is reviewed and analyzed by potential lenders.

Let’s review the credit score system in the United States, including some simple optimization strategies. When you have a basic understanding of credit scores and their implications, buying a new car can be easier than you think. 

Why your credit score matters

When people buy a new car, most of them need to take out an auto loan. Whether you’re borrowing from a mainstream bank, a car dealership, or a community-based lender, the institution lending you money wants to know how much you can be trusted with. They will use a variety of financial and employment records to measure your creditworthiness, and your credit score is a significant factor in this decision.

Above all else, lenders are interested in your ability to pay back the loan in the designated time period. Individual credit scores are an attempt to verify this ability based on historical data and current accounts.

What is a credit score?

Your credit score is a simple three-digit numerical expression produced by credit reporting agencies or bureaus. There are two primary credit score systems used in the United States. Fair Isaac Corporation (FICO) is the most widely used model, and VantageScore is a popular alternative. The former collects and tweaks data from multiple reporting agencies, and the latter collates data from three credit bureaus: Experian, Equifax, and Transunion.

Regardless of the model used, this number is based on a detailed analysis of your borrowing history and current credit files. While credit scores can seem like they’re set in stone, they do change frequently over time in relation to financial accounts and inquiries. Your credit score is widely used by financial institutions, along with utility companies, retail stores, and other entities that need to measure financial risk.

Personal credit scores are based on the financial history of each individual. Agencies use a closely guarded mathematical formula to collect and weigh data from multiple sources. Your credit score is also affected by open accounts, total amounts of debt, and repayment histories, among many other factors. While the credit score system leaves no room for discretion, it can be influenced by a number of factors firmly in your control.

In the United States, your credit score is a number between 300 and 850. Lower numbers represent less creditworthy individuals, and higher scores are likely to lead to more lending options. While not set in stone, the following levels are typically applied to auto loans:

  • Super-prime credit: 780-850
  • Prime credit: 660-779
  • Non-prime credit: 600-659
  • Subprime credit: 500-599
  • Deep subprime credit: 300-499

How your FICO credit score is created

If you want to improve your credit score, you need to have a basic understanding of how it’s created. Although there are slight differences between credit models, the basic information used to formulate scores is shared between agencies. And while the FICO score was developed in 1989 using secret algorithms, the way different elements are weighted has been released. 

According to FICO, the three-digit number assigned to you is based on the following factors:

  • Payment history comprises 35% of your score, which indicates your ability to pay bills on time.
  • The ratio between the outstanding debt and credit limits is weighted at 30%, which indicates the total amounts owed.
  • The length of your credit history makes up 15% of the overall score, which indicates your track record.
  • Credit account diversity represents 10%, which demonstrates your ability to manage different types of debt.
  • New credit makes up the final 10% of your score, which is based on recently opened accounts.

The link between credit scores and interest rates

Your credit score has a huge impact on whether or not you will be offered a car loan. Approval is not the only factor at play, however, with your score also affecting the interest rates available to you. As mentioned above, credit scores are one of the primary tools available to lenders to measure the risks associated with each loan. This is not a simple binary decision, as each lender offers different interest rates and loan terms in order to manage risk effectively over time.

People with a better credit score are generally deemed to be at lower risk, which means they are likely to be offered more competitive interest rates. While a compromised credit score does not always eliminate your lending opportunities, it will almost certainly limit you to certain interest rate brackets.

How do credit scores affect auto loans?

Not all loans are created equal, as mortgages are treated very differently from business loans, personal loans, and auto loans. In the United States, a prime credit score of 660 or above will give you plenty of car loan options, both from traditional banks and non-mainstream lenders. 

Prime credit scores are associated with very good interest rates, with highly competitive super-prime rates also offered by some lenders. Generally speaking, people with a prime or super-prime credit score will have access to the same lending opportunities, although the interest rates on offer may differ between these levels. If your credit score is below 660-680, however, you are likely to face higher interest rates and tough questions about your credit record.

If your credit score is below 600, you may have to meet more stringent documentation standards, and once again, interest rates are likely to be higher. If you’re down in deep subprime territory below 500, lenders will generally see you as a red flag. While people with bad credit scores can still get car loans in many situations, access to mainstream lenders may be ruled out.

How to optimize your credit score

If you want to get a car loan but have a less-than-perfect credit history, there are ways you can optimize your credit score. From checking reports and disputing errors to making payments and limiting new accounts, the following ideas are a great place to start.

Check your credit score

If you want to get a car loan, you should check your credit score first. This can help you to avoid nasty surprises and set realistic goals regarding car types, interest rates, and loan terms. According to the Fair Credit Reporting Act (FCRA), each of the three credit bureaus has to offer one free report each year when asked. You can easily check your credit report at, with separate scores also available from each agency.

If you want to review your FICO score, there are multiple options available. Along with commercial credit monitoring and reporting services, there are a number of ways to review your FICO score for free. For example, American Express and Bank of America customers issue free FICO scores to all cardholders, and Discover Credit Scorecard and Experian Boost provide a free score to all registered users.

Identify credit score errors

After you have checked your credit scores, it’s important to review them for errors and monitor them over time when changes occur. Mistakes are more likely than many people think, including clerical errors, identification errors, and historical errors due to divorce, separation, or family breakdowns. For example, if your ex-spouse’s information remains on your personal credit report, it can lead to errors. If you spot any kind of mistake, you should gather evidence and contact the bureau that issued the incorrect report.

Make your payments on time

Along with checking your records and recognizing mistakes, there are lots of proactive things you can do to improve your credit score. While you won’t see the benefits immediately, paying your bills on time is the most obvious way to raise your credit score. From mortgage and business loan payments to credit card bills and utility accounts, all of your household bills play a role in setting your credit score. If you struggle to remember payment dates, setting up automatic reminders or even just buying a calendar can have a positive impact.


Limit your credit accounts

As mentioned above, your credit score is affected by the number of accounts you have open and the number of inquiries you make. From the credit cards in your wallet to the frequency of new applications, simplifying your financial life can have a positive impact. For example, you should avoid credit limit increases on existing products, new retail store cards, and anything else that’s likely to affect your credit score. If you need a new card or service, you can avoid many issues by submitting pre-qualification forms.

Leverage alternative credit data

If your standard FICO or VantageScore is compromised in any way, you may be able to take advantage of alternate credit records. While not all lenders are willing to look at these non-traditional sources, community-based lenders and other non-mainstream institutions often have a more flexible approach. While a scoring formula is still needed to help lenders make decisions, the following two options are available:

  • FICO introduced the UltraFICO score in an effort to improve credit options for low-income people. This scoring system is based primarily on your banking activity.
  • Experion created a similar alternative with Experian Boost, which takes payment data from your utility and cellphone accounts into consideration.

Get a cosigner

If you’re looking for a way to circumvent the credit score review process, getting a cosigner for your loan can be very useful. While you are still personally required to make payments over the term of the loan, the cosigner’s credit score is used during the initial approval process. However, it’s important to understand the details of this arrangement, especially that the cosigner is held responsible if something goes wrong. If you are not careful, this can have a range of financial, legal, and personal ramifications. The cosigner’s credit score is not the only thing checked by lenders but also their income and debt to income (DTI) ratio.

Find the right lender

Upgrading your credit score is a great way to improve your chances of getting a car loan. There is only so much you can do, however, especially if you need a new car in a relatively short period of time. Along with your credit score, it’s also important to focus on your lender. There are lots of options out there, from mainstream banks and credit unions to commercial car vendors and community-based financial cooperatives.

Generally speaking, mainstream banks and credit unions will offer the lowest comparative interest rates, but they’re also the least likely to accept people with a bad credit score. Commercial car yards are on the other side of the spectrum, accepting people more readily but also charging extremely high interest rates. Some community-based lenders offer the best of both worlds, with easy approval and flexible loan conditions combined with competitive rates and low fees.

The DCCU advantage

If you want to get a great car loan but have a less-than-perfect credit score, DCCU is here to help. As a community-based financial institution, our lending service is based on honest advice, flexible conditions, and competitive interest rates. We help people from a range of socioeconomic backgrounds to find car loans and access other lending services.

DCCU is owned by our members, and our financial cooperative is dedicated to “building lifetime relationships through personalized financial service.” As a local neighborhood credit union, we proudly deliver great products and friendly service to everyone in the Madison community. Regardless of your credit score or financial history, our team is willing to lend you a hand. Please contact DCCU to find out more.