Applying for a car loan can be an exciting step, but it’s important to that your credit score is in good shape before approaching lenders. Your credit score significantly influences the interest rates you’ll qualify for and a higher score can save you money over the life of your loan. Here’s a guide on how to enhance your credit score before applying for a car loan.
Table of Contents
Understand Your Credit Score
Firstly, obtain a copy of your credit report from major credit bureaus—Equifax, Experian and TransUnion. You’re entitled to a free report from each bureau once a year through AnnualCreditReport.com, so when you see the new Volkswagen for sale you’ve been wanting, use that opportunity. Review your reports thoroughly for any inaccuracies or outdated information. If you spot any errors, dispute them immediately as they can unjustly lower your score.
Pay Down Existing Debt
Lowering your debt is one of the best ways to raise your credit score. Pay attention to how much you owe on your credit cards—especially the ones that are getting close to their credit limitations. The recommended credit usage rate is less than 30%. This refers to how much credit you use in relation to your limitations. Reduce it even more to less than 10% if you can, as this will improve your score even further.
Make Timely Payments
Make sure that all your bills, not just credit cards or loans, are paid on time. Payment history is the largest component of your credit score, accounting for 35%. Setting up automatic payments can help avoid missed deadlines. If you have missed payments, getting current and staying current can gradually mend your credit standing.
Avoid New Credit Inquiries
In the months leading up to your car loan application, avoid opening new credit accounts. Each time you apply for credit, a hard inquiry is made, which can temporarily lower your credit score. Multiple inquiries in a short period can compound this effect. Moreover, opening new accounts decreases the average age of your credit accounts, which can further lower your score.
Keep Older Accounts Open
The length of your credit history also contributes to your credit score. If you have older credit accounts, keep them open, even if you no longer use them. This helps maintain a longer average credit history, beneficial for your credit score. However, make sure these accounts don’t have high annual fees that aren’t justified by the benefits they provide.
Diversify Your Credit Mix
Lenders like to see a variety of credit types on your report because it indicates you can handle different credit responsibilities. If your credit is primarily from credit cards, consider adding an installment loan (like a personal loan). This diversification can positively influence your score, as long as you manage the new credit responsibly.
Monitor Your Progress
Finally, keep track of your credit score changes and reports. Many credit card issuers and financial websites offer free credit score updates. Monitoring your credit can help you understand the impact of your financial actions and prepare more effectively for your loan application.
Getting the Best Loan
Improving your credit score before applying for a car loan is about managing your current debts responsibly, correcting any inaccuracies on your credit report and being strategic about new credit. By taking these steps, you enhance your chances of getting approved for the loan and can secure better loan terms. Start early and by the time you walk into the dealership, your credit score will be ready to help you get the best deal possible.
