For many consumers in this country, a credit score is something that remains a complete mystery to them until they’re smacked in the face with it when the try to make a big purchase. Trying to buy a car is one of those instances when many of those consumers find out that they’re looking at getting a car loan with bad credit. If one is to have complete control of his, or her, finances then, it’s important that one knows everything there is to know about where he, or she, stands in the credit market – ignorance is not bliss.
A consumer attempting to get financing for something, such as a car, must have all of his, or her, own financial information at hand in order to make a purchase that is economical and practical. It’s time for that consumer to find out what his, or her, credit score is in order to make informed decisions about where his, or her, financing will come from, how much interest will have to be paid and how long that loan will have to last. For any consumer, getting one’s credit scores is easy. They can be had at anyone of the three major credit reporting bureaus in the country, Experian.com, TransUnion.com, and Equifax.com.
A credit score is a numeric expression of an individual’s risk as a borrower and is calculated based on payment history, length of credit history, new credit, types of credit used, and debt according to the Fair Isaac Corporation’s (FICO) method of processing. Since income is not a factor in a credit score, it’s possible for a person with a high income to have a low credit score and a person with a low income to have a high credit score. The reasons behind what seems to be counter intuitive is that some people with large incomes may have a short credit history or chronically be late in paying bills while a lower income consumer might pay all their bills on time and have a lengthy credit history. For any consumer wanting to know their credit score, it’s wise to order all three credit scores as lenders will use all three and average them or pick the middle-value score. Credit scores range from 300 (the worst) to 850 (perfect credit) and are divided into categories that are based on certain economic and statistical factors rather than an even spread of numbers and the cutoff for good/bad credit sits at a score of 620.
While an individual’s credit score is important to the car loan process, it is not the only thing lenders will look at particularly in approving a car loan with bad credit. An individual’s annual credit report comes into play. Unlike a person’s credit scores, the annual credit report is a detailed history of a person’s financial activity involving any transactions that don’t rely on cash including utility payments, rent or mortgage payments, credit card debt, etc., along with all failures to make payments on time, or at all. This report, while an official document, can contain inaccuracies and it’s incumbent upon the consumer to make sure that there are no errors in his, or her, credit activity. Like credit scores, a person’s annual credit report is available at any one of the big three credit reporting bureaus as well as AnnualCreditReport.com and FreeCreditReport.com, and, according to the Fair & Accurate Credit Transaction Act of 2003 must be made available to the consumer at no cost.
Most lenders are knowledgeable about all the financial factors that go into a potential borrower’s ability to pay off a loan. Income plays a significant role in whether or not a borrower will qualify for a car loan. With bad credit, a lender will look at the borrower’s income to find out if that bad credit is the result of some financial emergencies or a behavior pattern that indicates he, or she, might be a deadbeat. If a lender determines that a borrower makes enough money to meet the obligations of the debt, it will look into the details as to why that borrower would be seeking a car loan with bad credit including how much debt the borrower is currently carry versus how much he, or she, is earning each month. If the applicant’s monthly debts outpace that person’s monthly income, a lender would likely disqualify him, or her, for a car loan. The debt-to-income ratio is a real world quality that lenders can use to judge how smart an individual borrower is with his, or her, money. Irresponsible spending habits are a sure sign that a customer is a lending risk and denial of a car loan application is almost assured.
For the person borrowing money to buy a car, failing to keep track of credit debt is a fatal mistake when it comes to getting a car loan, and bad credit is, usually, a condition that will follow him, or her, throughout life. Fixing debt problems is a goal that all people struggling with bad credit should work to overcome before considering getting deeper into debt. While credit cards are an easy path to uncontrolled personal debt, they can be a factor in improving credit scores as well. By paying off credit debt prior to applying for a car loan and habitually making all monthly payments on time, an individual’s credit score will improve – over time. It’s not an instant fix to repairing damaged credit, but it is a fix and could push a consumer into the next higher credit bracket within a year’s time. Allowing credit debt to become delinquent or, simply defaulting, a consumer runs the risk of having his, or her, credit score to drop to the point where financing for anything will become impossible. It’s a priority to aggressively pay down existing debt even if it means sacrificing certain comforts to achieve this goal – it’s amazing what people can do without when they really think about it.
All consumers must take control of their personal finances if they are to maintain good credit health. Fear may prevent some people from wanting to know what their credit scores are, or what information is contained in their credit reports not realizing that this self-imposed ignorance will cost them money, time, and opportunities at better living. For the individual, aggressively pursuing personal responsibility can lead to greater personal freedom and there will come a time when they will never have to apply for a car loan with bad credit again.