Right off the bat, this is where the great majority of car buyers go wrong. After budgeting for an auto purchase, this is the very next thing you should do.
But most people leave it to the very end: Once they've decided on a car, driven it around the block and hammered out a price with the salesman and his manager, only then do they apply for credit and find out what their credit score is.
Do it the smart way: Check your credit up front, before you set foot in a dealer's showroom. Start this process months before you plan to purchase, if possible, because if you have incorrect or outdated information that's lowering your score -- and therefore raising the interest rate you'll have to pay -- it can be removed, but it takes at least 60 to 90 days.
Get your credit report
There are three national credit reporting agencies, Equifax, Experian and TransUnion. You will need to get your report from all three agencies. You can get them by paying a nominal fee, usually less than $10. Better yet, thanks to the 2003 Fair and Accurate Credit Transactions Act, every American is entitled to a free credit report from each agency every 12 months. You may also qualify for a free report under certain circumstances -- being turned down for credit or if you suspect fraud, for example. If you're married, make sure to get one on your spouse as well.
Also, check to see what your FICO score is. Named after Fair Isaac Corp., the firm that developed the scoring model back in the 1950s, the FICO compares the information in your credit report to what's on the credit reports of thousands of other customers.
FICO scores range from about 300 to 900. The higher your score, the better a credit risk you will be considered. It's difficult to say what's a good or bad score, though, since lenders have different standards for how much risk they will accept.
A used-car lot that boasts it will finance anyone likely will not care if your FICO score is 500. That's because they will have jacked up the price on their cars and their interest rates to cover their costs of repossessing the vehicles they sell to high-risk customers who default.
How is the credit score determined?
Your credit score is based on five factors:
- Past payment history.
- Outstanding debt.
- How long you've had credit.
- How much new credit you've sought recently.
- The types of credit you have.
Using your credit report -- or your general knowledge of your credit situation -- you can estimate your FICO score by clicking on this free FICO Score Estimator. The vast majority of people fall into the 600 to 700 range, and the best auto financing rates are generally available only to those who score above 700.
Next, check the report for misinformation, such as accounts that don't belong to you, accounts that have been closed but still show as open, billing disputes that were resolved and incorrect credit limits or balances. Look for outdated information. As a general rule, a negative report stays on your record for seven years and a bankruptcy for 10 years. The credit reporting company has to support the information it has on you. No support, no black mark. So ask to see it. If the support is erroneous, write to the company with which you originally did business. Send it copies of any documents you have supporting your position and request that it send corrected information to the credit bureaus it reports to.