Buying a new car or upgrading your old one? Then it’s time to get your finances in order. To get the best deal and interest rate, it’s important that you have a clean credit report and strong credit score.
Your credit must be in good shape, which is only possible if you pay your loans and bills on time. Lenders will check your eligibility for an auto loan. They will approve your request only if you have a steady source of income and a good credit score. How can you make sure you do? Try these steps to help you build a good credit score so you can bring your favorite car home.
Use a Secured Credit Card
A secured credit card offers a simple and effective way of building or rebuilding credit. The key difference between a secured and unsecured credit card is that you put down a deposit to open an account. The deposit amount determines your credit limit.
A secured credit card can be beneficial if you are starting your credit journey or battling some rough financial patches. You can use it to get your credit score back on track. By using a secured card judiciously, you can improve your credit score within six months to one year.
An improved score will allow you to qualify for an unsecured card eventually. Some card companies will even let you transfer your secured line of credit to an unsecured card. This can help your credit score as you don’t have to open a new account.
Reduce Your Credit Card Debt
While planning to apply for a car loan, the last thing you want to do is take on other new debt. Focus instead on reducing your existing credit card debt. It can help lower your credit utilization ratio and improve your credit score. Your credit utilization ratio reveals the available credit on your credit cards.
It is the second most important factor in your credit scores after your payment history. The credit utilization ratio is calculated by comparing the total limits on your credit accounts to the balances. If the score is 30% or less, your creditworthiness is in great shape. It also results in a lower debt-to-income ratio. Your DTI tells lenders if you are financially stable to afford monthly payments on a loan.
Pay Your Bills on Time
The most important element in your credit card score is the payment history. It accounts for 35% of the overall credit score composition. Late payments can pull your score down, while timely payments will improve it. If you want to see that car in your garage, make all your bill payments on time and consistently.
Doing so will have a steady and positive impact on your credit score. You may lose track of due dates if you have many payments to make. Set up automatic payments or use the reminder feature on your phone or calendar. You can access most accounts online or via an app, so make use of those tools when possible. This can help you stay on top of your payments.
Apply for Credit Only If You Really Need It
When you apply for credit, it triggers a hard inquiry into your finances. This can lower your credit score, and the impact may last for a few months. Applying for credit frequently may initiate several hard inquiries, which may negatively impact your credit score for even longer.
Is there a way to look for a car loan without initiating multiple hard inquiries? Getting preapproved for a car loan is a simple way of preventing multiple hard inquiries. It is regarded as a soft inquiry when a company checks your credit score to process your preapproval application. It won’t show up on your credit score.
A preapproval is merely a conditional loan offer. You must still get final approval from the lender. However, preapproval can give you a clear picture of how much you can spend on buying a car. It will also tell you how much the loan will cost. Preapproval will also give you more negotiating power.
Identify Credit Report Inaccuracies and Contest Them
Do you believe there is an error in your credit report? Contest the claim immediately with the reporting agency. Doing so will not harm your credit score. If there is a mistake, getting it rectified can improve your credit score. Dispute the error to the credit reporting bureau through the resource provided by them for such claims.
The credit bureau will investigate and verify the information by running a proper check on the dispute. Any information that cannot be verified will be updated or deleted. If it’s wrong, it will be corrected.
Conclusion
Poor credit can make it tough to apply for a car loan. A good credit score can smooth the path to getting a loan approved. You can also enjoy lower interest rates and favorable terms. Before you prepare to meet the car dealership, follow the above tips. This will ensure that your credit report and credit score are in good shape. Then you can be the proud owner of a car before long.