Fix your credit before seeking a car loan

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Experts say the credit crunch is loosening. But to get the best interest rate on your car loan, your credit score needs to be as high as possible. These days only about 10 percent of applicants qualify for the zero- or low-interest promotions offered by manufacturers.

Here are three questions to ask before you fill out your first credit application for a new car.

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What’s your ratio of debt to the credit you’ve been extended? About a third of your credit score is based on the ratio of what you owe to the credit limits you’ve been extended on your credit cards. To get the best credit score, you want your ratio to be no higher than 20 percent, and ideally, closer to 10 percent. In other words, if you have $20,000 in credit extended to you, you want to owe no more than $4,000. Your overall ratio and the ratios per card are assessed, so you can improve this ratio by spreading your debt out over more credit cards and applying for an additional card (which will cause your score to drop initially, but will rebound shortly).

Have you made a payment more than 30 days late? Another third of your credit score is based on how timely you are with making payments. Lenders won’t report late payments to the credit bureaus unless they are at least 30 days late. If it is reported, it could lower a high credit score by as much as 100 points. If you must complete a car loan application with a missed payment on record and you don’t have a history of late payments, you can call the company and ask if they’ll make an adjustment to their report, but don’t count on them to say yes.

How long is your credit history? Credit history makes up about 15 percent of the overall credit score. The more years you can show that you have been responsible in managing your credit, the better your credit score. As a result, it’s best to keep your oldest credit accounts active, even if you use them only minimally, since closing them will affect your credit score negatively. If you are someone who has a short credit history, then you may get a better car loan rate in a few years, though remember that the credit ratio and timeliness of payments make up about two-thirds of your overall credit score.

Once you know the answers to the above questions, order your credit report from each of the three reporting bureaus. Everyone is entitled to a free credit report from each bureau annually from, but these don’t contain credit scores.

Go over the reports carefully, making sure it’s 100 percent accurate. Follow the instructions that accompany the credit report to correct any errors, especially ones that relate to late payments, credit limits and balances carried and length of time each account has been open, as these are the items that have the greatest impact on your credit score and your car loan. After checking your free credit report for errors, buying one report with a credit score is a good idea.

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If you have a car question, email it to us at Driving for Dollars. Read more Driving for Dollars columns and Bankrate auto stories.

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