credit history

Cars & Credit: How Your Credit Impacts Car-Buying

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Purchasing a car can help boost your credit score if you consistently make on-time impact of credit on car buying speedometer type image showing scredit scorespayments. On the other hand, you need fair or better credit to qualify for a car loan.

How can you get the loan you need, then, if your credit is not ideal?

It helps to understand just how important credit is to obtain a car loan and what steps you can take to increase your ability to do so.

Factors Impacting Your Ability To Buy A Car

If you wish to buy a vehicle using a loan, you need to prove to the lender that you are a good credit risk.

In every situation, the lender needs to weigh just how much risk a borrower is based on how likely they are to repay the debt in full. Borrowers who are a very high risk may not qualify for the loan. On the other hand, borrowers that are a lower risk may qualify for a lower interest rate.

When vehicle lenders consider you for an auto loan, they are thinking about the following:

  • What do you want to buy – is it worth how much you want to pay for it?
  • Do you have previous borrowing experience that shows you are a reliable borrower?
  • Do you have the financial means to repay your debt on a monthly basis along with any other debt you have?

It is up to you, then, to show lenders your goals are achievable. Even if you have never obtained a vehicle loan in the past, working with a credit union or other lender is possible if you can show you are a good risk.

Type of vehicle

First, consider the vehicle itself. How does the vehicle play a role in whether or not a lender will give you a loan?

Car loans are secured loans in most cases. If you stop making payments on the loan, the lender will force the sale or repossession of the car. This offers the lender a bit of a safety net. They can sell the car to recoup at least some of the cost of the loan.

For this reason, car loans tend to be a bit easier to qualify for than an unsecured loan, such as a personal loan.

The lender must learn about the actual value of the car. They use a number of tools to determine this including an appraisal of the vehicle. It does not matter what the dealership wants you to pay for the car. The vehicle must be worth that much from a third-party appraisal service.

If the vehicle is worth the amount you wish to buy it for, the lender may approve the loan for you.

Credit history

The next step is determining if you qualify for a car loan based on your previous borrowing history.

The best way for a lender to know this is to pull a copy of your credit history. This includes all of the accounts you have had in the past. It covers previous car loans, credit cards, any judgments against you, and mortgages. Most lenders use a credit score to determine your qualifications. A score is simply a mathematical representation of your borrowing history.

Poor or no credit history?

Some people have no credit history. Others have a poor record of making payments on time.

If you find that your credit score is limiting your chances of obtaining a loan, there are several things you can do…

  • Make on-time payments on all current debts. Doing this for several months increases your dependability. Avoid being late on payments.
  • If you have no credit history, consider a secured credit card or a low-fee credit card. Most credit unions and credit card companies offer these to those who have employment.
  • Consider paying down some of your debt. The lower your debt to credit limit ratio, the better.
  • Don’t apply for too many credit cards or loans in a short period of time. Aim for no more than one or two every few months to a year.
  • Get a co-signer for your loan. A person who has a good credit score can help you qualify for a loan. And, in the long term, this can boost your credit score as well.

Gradually work on improving your credit score over time. When you do so, you eliminate the lender’s concerns that your past borrowing habits will translate into a new loan.

Employment status

Finally, a lender needs to know you have the income necessary to make payments on the vehicle. Even if your credit is fantastic, if you do not have a way to prove to the lender that you have income, then the lender is unlikely to offer you a loan.

More specifically, the lender is looking at your debt to income ratio. How many expenses do you have compared to how much income you have coming in? The lower this total, the more likely you are to have the cash on hand to make payments.

If you do not have steady employment, you may wish to work on this as a first step. Be sure you can prove to your lender that your employment is reliable, too. Paycheck stubs can assist in showing steady employment.

The Role Credit Plays In Car Buying

Each one of these factors plays a role in your ability to obtain a new car loan.

Other factors can do so as well. The interest rate, whether or not you have a down payment, and even if you are buying a new or used car can impact the lender’s decision. Yet, beyond anything else, it comes down to your ability to make payments on a timely basis.

If you are unsure whether you qualify for a car loan, work with your local credit union. They know you and are more likely to lend to you than traditional banks. These loans may even be more affordable than those obtained from other sources.

Learn more about auto loans at Destinations Credit Union.

How Many Credit Cards Should I Own?

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The importance of maintaining a good credit score is old news. As you likely know, theStack of credit cards higher your score, the more attractive you will be to potential lenders, making larger loans and the best interest rates more accessible.

Hopefully, you’re working hard at keeping that score high by using your cards and paying your bills on time. You may be wondering, though, if more is better. Should you open a few more and get more available credit? Or, are too many cards a liability to your score?

Read on for the answers to all your questions.

How your credit score works

Before we answer the number of cards question, let’s explore the way FICO and other credit scoring agencies, like VantageScore, calculate that all-important credit score.

Here are the major components of your credit score:

  1. Your payment history. The timeliness – or lack thereof – of your payments comprises 65% of your FICO score, making it the most important factor. VantageScore, another major credit scoring company, doesn’t share the percentages it uses, but it calls payment history “extremely influential” in determining your score.
  2. Your credit utilization. Credit scoring companies look at how much of your available credit you are using.A large amount of available credit – even in aggregate across multiple cards – is not always a good thing.
  3. The age of your credit. Next up on the list of influential factors is how long you’ve had your credit cards open. Lenders want to see a long and active history of credit cards and on-time payments.
  4. The kind of credit you have. A variety of credit indicates that you are an attractive borrower.

The benefits of having multiple cards

Having one open credit card is not sufficient for achieving a high credit score. In order to give you the best shot at excellent credit, make sure you have several open cards. In the long run, having multiple cards can boost your score in two important areas:

  • Your payment history. When you pay several credit card bills on time instead of just one, this component of your score will go up.
  • Credit utilization rate. FICO likes to see a low credit utilization rate. This means that the more unused credit you have, the higher you will score in this area. Having multiple cards open will automatically increase your available credit. You’ll also be able to spread your credit use across several cards, further lowering your credit utilization rate.

The right number of credit cards

Are you waiting to hear that magic number telling you exactly how many cards you should have in for achieving and maintaining a high score? Well, unfortunately, there is no such “magic” number.

As mentioned, you do need to have several credit cards to increase your credit age and available credit, but there is no specific amount you should have. Instead, let’s take a look at the credit cards of consumers who have excellent scores.

The FICO high-achiever statistics track people with FICO scores that top 785. These statistics find that the average FICO high-achiever has 7 open credit cards. Of these cards, only four have outstanding balances. The average credit account is 11 years old and the most recently opened account is 28 months old.

So, while you may be quick to observe that several cards may be a good thing, consider the age of the cards in the wallets of high achievers. Perhaps lots of NEW cards won’t help you achieve excellent credit. Rather, a proven track record of on-time payments and responsible use of credit is the vital factor here.

When not to open new cards

If you’re planning on taking out a large loan, like a mortgage or an auto loan, within the next year, it’s not a good idea to start applying for new cards. Here’s why:

  • Hard checks on your credit. Every new credit card you apply for means another time your credit history gets pulled. Lots of “hard checks” can negatively affect your score – just what you don’t need before applying for a large loan. It may hurt your chances of approval and/or increase your approved rate.
  • Your credit age will decrease. The age of your credit is determined by taking an average age of all your cards. By opening lots of new cards, you’re bringing that average down and hurting your score.
  • Your credit variety will be lessened. Similarly, opening more unsecured cards with revolving credit will lower your credit variety, because you will suddenly have a much heavier amount of unsecured credit lines and less of other types of borrowings.
  • Too much open credit. While once considered a positive attribute across all credit scoring companies, the recent modifications to the VantageScore have changed all that. Lots of open credit will now negatively affect your VantageScore. This score is used for auto loans and other large loans; though most mortgage lenders currently only consider your FICO score.

Here’s the final word on having lots of open credit cards: If you’re just starting to build your credit and don’t plan on taking out a huge loan soon, it’s a good idea to open a few cards. Pay them on time and try not to go above 30% of your available limit on any of them. But, if you plan on applying for a large loan in the near future, give that card acquisition a rest and focus on using the cards you have responsibly.

Whichever category you fall into, remember to use your cards and pay those bills on time! The easiest way to do this is to make it automatic. Set up each of your credit cards to pay for a monthly bill. Then, set up your credit card bills to be paid automatically as well.

Keeping your credit score strong can have positive effects on your finances for years to come! Contact Destinations Credit Union or our partner financial counselor, Greenpath, for ways to improve your credit score!

Your Turn: How many credit cards do you own? Do you think this number is too few or too many? Share your thoughts with us in the comments!

SOURCES:
https://www.bankrate.com/credit-cards/how-many-credit-cards-is-too-many/
https://www.google.com/amp/s/lifehacker.com/how-many-credit-cards-should-i-have-1658094283/amp
https://www.creditcards.com/credit-card-news/too-many-cards-1586.php
https://www.nerdwallet.com/blog/finance/too-many-credit-cards-hurt-fico-score/
https://www.google.com/amp/s/www.creditkarma.com/credit-cards/i/how-many-credit-cards-does-the-average-american-have/amp/