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or outdated information that's lowering your score -- and therefore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 removed,
but it takes at least 60 to 90 days.
Get your credit report
There are three national credit reporting agencies, Equifax,
Experian and Trans Union. 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
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 frau, for example. If you're married,
make sure to get one on your spouse as well.
First, check to see what your FICO score is. Named
after Fair Isaac
Corp., the firm that developed the scoring model back in the
1950s, 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
very 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 credit score determined?
Your credit score is based on five factors:
||past payment history
||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, incorrect credit limits
or balances. Look for outdated information. As a general rule, a
negative report stays on your record for seven years; 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.