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 AnnualCreditReport.com, 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.

 

Facebooktwittermail

Starting from Zero: Financing a Car When You Have No Credit History

Are you searching for a new car but confused about finance? Are you struggling to see a way forward with no credit history? Buying a car is an exciting time, but it can also be confusing and stressful. While unlimited funds will get you the vehicle of your dreams and a perfect credit score is a huge advantage, not everyone is lucky enough to be in this position. Whether you’ve just left home, migrated from overseas, or recently become independent, everyone has to start from somewhere.

If you have no credit history whatsoever, there is still a way forward. Starting from this position does make the road more challenging, but there are multiple options available. Let’s take a look at credit scores in the United States and review the impact of credit on your lending opportunities. When you understand the basic tenets of the credit landscape, you can make smart choices about your future and look for viable alternatives to get the car of your dreams.

What is a credit score?

In the United States, your credit score is a number assigned to you by one or more recognized credit bureaus. This simple numerical expression is based on a detailed analysis of your credit files in order to represent your creditworthiness at any particular time. Your score is based on your credit history, which is based on your open accounts, total amount of debt, and repayment history, among other factors.

Your credit score is a number between 300 and 850, with higher scores likely to lead to more lending options:

  • Excellent credit: 800-850
  • Very good credit: 740-799
  • Good credit: 670-739
  • Fair credit: 580-669
  • Poor credit: 300-579

While people talk about one credit score, there are multiple scores available based on individual credit reports created by different credit bureaus. The most popular credit score model was created by the Fair Isaac Corporation (FICO), which compiles data from multiple sources. FICO has a competitor in VantageScore, which uses data from three major credit reporting agencies: Experian, Equifax, and Transunion.

Why your credit history matters

When banks and other lenders decide whether to lend you money, your credit score is very influential in their decision. While they will also look at many other factors, including your income, debt levels, and deposit, they are primarily interested in your ability to pay back the loan in the designated time period. In the modern financial world where personal relationships don’t mean much, your credit history is a measure of how much you can be trusted with money lent to you.

How to check your credit score

Credit scores are developed slowly over time, which gives lenders a reasonably accurate overview of your long-term financial situation. When it comes to borrowing money, lenders don’t want to make decisions based on your current circumstances alone – they also want to review your history as a borrower. If you don’t know what your score is, you can check your credit report at AnnualCreditReport.com. Additionally, separate scores are available from each of the three reporting agencies.

No credit vs. bad credit

Having no credit is very different from having bad credit. If you’re just starting your financial life for any reason, you are said to have a “thin credit file.” Instead of a compromised score, this simply means that lenders don’t know how much money you can be trusted with. In contrast, a bad credit score means you have a history of borrowing and have faced difficulties along the way.

People have no credit history for multiple reasons, which is one of the challenges you will need to overcome. You might be young and just starting out in life. Perhaps you’re a recent immigrant to the United States or a newly independent person separated from a partnership. If you don’t have a credit card or haven’t ever borrowed money from a bank or mainstream financial institution, you may have absolutely no credit history.

According to Consumer Financial Protection Bureau (CFPB) research, 45 million Americans are known to be “credit invisible.” This describes people with shallow financial records or no credit records whatsoever. Credit invisible people don’t have a credit score with FICO or any of the three major credit bureaus. According to this worrying study, there are “credit deserts” all over the country, with this term used to describe neighborhoods where people lack access to mainstream borrowing opportunities.

Options for people with no credit history

If you have no credit history whatsoever, you may face difficulties accessing credit. However, while buying a home can prove extremely challenging, less expensive items like cars are very much possible. While you might have to think outside the box, there are loans out there and lenders willing to help.

From negotiations and cash sales to cosigners and community lenders, let’s look at the options available to people with no credit history:

Negotiate a better deal

It’s important to remember this – your ability to access credit is always based on the value of the loan. While this might seem obvious, one of the best ways to get the car of your dreams is to negotiate a better deal. Whether you’re making a private deal or buying from a commercial car yard, the art of negotiation is alive and well when buying and selling automobiles. Both the sticker price and the trade-in value may be up for negotiation, with a lower overall price making it much easier for you to access credit.

Improve your down payment

Along with lowering the price of the car, you can improve your chances of getting a loan by increasing the amount of your down payment. While this is not always possible, making a large down payment shows that you are serious about the deal. If you have a compromised credit history or no history whatsoever, remaining patient and saving for longer often makes sense. From a lender’s perspective, it’s simple – a significant down payment shows that you’re a safer bet to repay the loan.

Pay cash for the car

If you’re in a position to pay cash for a new car, you can avoid borrowing any money at all. Once again, this is not always possible, but it’s a great option to have. If you don’t think you fit into this category, you may be wrong. Perhaps you can purchase a cheaper car in order to make a cash sale possible. Maybe you can borrow money from friends or family members to get on the open road sooner. Paying cash is not just a good way to avoid the impacts of a non-existent credit score – it’s also a great way to save money on interest over the term of the loan.

Get a cosigner

If friends and family are unable to lend you cash, or you don’t want to ask, they can still play a role in you getting a car loan. Having a cosigner is a great way to reassure lenders. In fact, this is the ideal way to circumvent the entire credit history checking process because another person takes responsibility for your loan. While you are still required to make loan payments, the cosigner is on the hook if the payments stop coming through. Depending on the loan, the cosigner may also be responsible for late fees and collection costs, along with surrounding legal obligations.

While a cosigned loan will affect both of your credit reports and can help you to build credit history over time, the other person’s credit score takes precedence when it comes to approving the loan. The other person’s score is not the only factor analyzed by lenders, however, with their job and debt to income (DTI) ratio likely to be checked before an application is approved. Before going down this path, it’s important to consider the long-term implications of a cosigner arrangement, including potential financial and relationship challenges.

Take advantage of alternative credit data

As mentioned above, there are multiple credit records available in the United States. If your standard FICO score is non-existent or compromised in any way, you may be able to use alternative records to get accepted for a car loan. When traditional proof is unavailable, some lenders are willing to look at non-traditional sources. While similar credit scoring formulas are still used, there are multiple options on the table.

In an effort to improve credit options for low-income people, FICO recently introduced the UltraFICO score, which is based primarily on your banking activity. Experion created another alternative with Experian Boost, which takes things like your cellphone and utility payments into consideration. While not all lenders are willing to use these records, community-based credit unions and other non-bank institutions are often more flexible in their approach.

Find the right lender for your situation

When you’re trying to buy a car with no credit history, it’s important to find the right lender for your unique financial situation. There are lots of options out there, from commercial car vendors to mainstream banks and credit unions, and community-based financial cooperatives:

  • Commercial car vendors – Commercial car yards often have finance options, but they are limited and can be extremely expensive and risky. Sometimes known as “buy here, pay here” deals, these loans are generally aimed at people with bad credit or no credit history. While these in-house loans may seem enticing, sky-high interest rates and significant ongoing fees are very common.
  • Mainstream banks and credit unions – Traditional banks and credit unions can be great places to obtain finance, but they’re often compromised when it comes to flexibility. If you have no credit history, you may be unlikely to meet their strict requirements. While a cosigner can be used in many situations, as mentioned, there are drawbacks associated with this path.
  • Community-based financial cooperatives – Small credit unions and community banks are more flexible and often more lenient when it comes to loan approval. Some lenders even have specific programs for people with no credit history, and others are much more willing to look past your credit score. While they still need to check you out, things like employment history, banking records, and utility payments can be used to check your creditworthiness.

Practical steps involved with getting a new car

Once you have a solid grasp of credit scores and how they affect your lending options, it’s important to take some practical steps toward car ownership. The following checklist is a great place to start:

  • Determine how much you can afford.
  • Check your credit history.
  • Save for a 20% deposit or more.
  • Consider family and friends as a cosigner.
  • Compare potential lenders.
  • Gain pre-approval before you shop.
  • Shop around for the best deal.
  • Apply for a car loan.

The DCCU difference

If you’re looking to get a car loan but don’t have any credit history, DCCU is here to help. We offer fair car loan arrangements that are highly competitive with the major banks. Unlike unscrupulous car vendors, our entire service is based around your needs. As a community-based institution, we are 100% committed to the economic and social well-being of our members. Our service is based on honest advice, low fees, and great rates.

We help people from a range of socioeconomic backgrounds to access car loans and other lending products. DCCU is owned by our members, and our financial cooperative is dedicated to “building lifetime relationships through personalized financial service.” Along with easy loan access and great deals, we provide a number of extras for car loans, including extended warranty protections and simple loan pre-approval. This can be a great negotiating tool, with price certainty leading to more confidence, better decision-making, and more competitive deals.

At DCCU, our values are strong and our message is clear: We are “a local neighborhood Madison credit union that stands for you.” Along with car loans, we offer a number of other lending services across Madison and surrounding counties. If you have no credit history and would like to get a car loan, please contact DCCU today to learn more about our services.

 

Facebooktwittermail

How To Choose The Right Personal Credit Card

Madison credit union credit cards
Take time to find the right credit card.

As the famous saying goes, “With great power comes great responsibility.”

This timeless piece of advice can be applied to many different things, but few more fitting than the mighty credit card. Yes, while all Madison credit unions offer credit cards that give members a chance to earn rewards points on the things they buy, make emergency purchases, and simply treat themselves every once in a while, they can also open the door to a load of financial troubles. Continue reading How To Choose The Right Personal Credit Card

Facebooktwittermail

Achieve Your Dreams with the DACA DREAMer Personal Loan

DACA personal loans at Madison WI credit union
Dreams come true with a DACA personal loan.

On June 15, 2012, President Obama signed an executive order establishing the Deferred Action for Childhood Arrivals (DACA) program. With this initiative, those individuals who came to the United States as children and meet specific guidelines may be considered for deferred action over two years. Continue reading Achieve Your Dreams with the DACA DREAMer Personal Loan

Facebooktwittermail