As adults, we all know how crucial credit scores can be. They can affect everything from your ability to get a job to your ability to get a loan and when it comes to car buying it’s no different. Banks consider how risky you are based upon your credit score and that, in turn, can greatly affect the cost of your loan when you are in the market for a new-to-you car. In fact, according to Bankrate, borrowers with good credit can get a loan with an interest rate of anywhere from 4% to 5% while those who have average credit are looking at interest rates of 10% to 13%. That means that your credit score can cost you hundreds or even thousands of dollars in interest payments over time. Previously, we discussed all the ways you can protect your credit while shopping for a loan, but how do you clean it up before even applying? Don’t worry, we have you covered.
First, pull your credit report. You should do this annually anyway just to be absolutely sure that nothing strange is going on and no one has stolen your identity. Bankrate suggests that you should do it at least once ever 4 months to keep a very close eye on your credit. You can get your free credit report once a year by visiting AnnualCreditReport.com. This is the site that is authorized by the FTC to offer credit reports, once per person, per year and it’s the best way to get a snapshot of your credit before buying or even considering buying a used car.
Once you have your credit report, check it. While it may seem simple enough, sometimes a deep dive in a credit report can find errors that can hugely impact your ability to get an affordable loan, amongst other things. If you find an error, work to correct it. Misspelled names, wrong addresses are small things. Finding an account that is opened in your name (and with your social security number) are big errors that need to be corrected immediately. Steps to do this are clearly outlined at the FTC’s site, here. Basically you need to contact the credit reporting bureau in writing, explaining the error, and include supporting documentation (copies—not originals). You also will need to contact the company with which the credit has been opened or tampered with and let them know that it needs to be corrected as well. It takes time for errors to come off of a report, so know that this isn’t a quick fix. It will, however, improve your credit down the road.
In addition to correcting errors on your report you need to keep your credit as is—meaning don’t close existing cards or open any new cards. Closing cards can reduce your level of available credit, and increase your debt-to-income ratio. Opening cards also increases your debt to income ratio. The best course of action is to repay any outstanding balances on cards you currently have and try your best not to add to your debt. As you lower the amount you owe, you decrease your debt-to-income ratio and you increase your credit score. Keep in mind that the creditors only send off their reports to the credit bureaus once per month. If you need to reduce your debt and impact your score its best to start paying your debt down anywhere from 45 to 60 days before you plan to apply for a new-to-you car loan.
Finally—the best way to improve your credit score is to give it time. Pay on time, and be patient. It can take up to seven years for a delinquency, bankruptcy, or tax lein to disappear from a credit report. Stay consistent and pay on time and your credit score will eventually improve. Just like the old fable of the tortoise and the hare, there is no quick way to improve your credit score--but slow, steady, and on time win the race.
Digital media content producer/consultant & former CNN senior producer, now running CN'TRL : Cars, Tech, Real Estate & Luxury.