Figuring out which new car to buy can be a very stressful experience. Financing decisions only add to that stress, especially if someone has bad credit. That's because having a poor credit score can lower the ability to get a competitive interest rate on a car loan.
Car Loans and Bad Credit
Advertisements for car loans don't even mention credit scores. In the marketplace, it's possible to find offers of zero percent financing, college graduate rebates, low down payments, and special financing packages available through automobile manufacturers. But what if someone had trouble making some of their monthly payments in the past?
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Bad credit can, and will, hurt a consumer's ability to get a competitive interest rate on a car loan. In fact, they may even be denied credit. Fortunately, it's possible to take steps to improve a credit rating; especially if it's lower than justified. In this article, we're going to explain exactly what a consumer can do if they think there is a problem with their credit score. That discussion will include steps necessary to have a credit report corrected. But first we're going to explain what a good credit score is for an individual, and what might be considered a bad score.
National Average Credit Scores
When getting a car loan from a dealership, local bank, or lender, one of the first things the financing company will do is check the applicant's credit score. Even though there are several reporting agencies that compile and report payment history information, these companies use the same basic approach to calculating what is sometimes referred to as a FICO score.
Comparing a score against the national average, or that found in a specific geography, can help a consumer to understand how their score ranks in terms of being labeled a credit risk. A more detailed comparison can also be made by looking at a table of FICO scores. From those tables, we know that only 15% of the population has a credit score below 600. With that kind of information, it's possible to get a good feel for how good, or bad, a score is compared to other individuals in the market for a car loan.
Credit Reports and Car Loans
Anyone that believes they have bad credit should take a closer look at their credit report. In fact, this should be done before applying for an automobile loan. A credit report is a history of payments to others. It contains records of payment patterns, which help to paint a better picture of someone's financial reliability. Obtaining a copy of a credit report allows a borrower the opportunity to correct any errors that might exist in the document. It's important to correct these errors before applying for a loan. This ensures the consumer has the best possible chance of getting a favorable interest rate on the loan. If there are incorrect line items appearing on a report, it's time to start taking action to help clean up a potentially damaging credit rating.
Erasing Bad Credit
There are a number of marketing claims stating that it's possible to erase bad credit. No matter what the advertisement says, this is simply not true. Many companies try to appeal to consumers with a poor credit history. They usually want to charge a fee to help clean up a credit report. This cleanup process promises to be a fast way to get a car loan. While it's critical to explore all options, providing false information when applying for credit is against the law.
Credit Repair the Right Way
Under the Credit Repair Organizations Act, companies offering credit repair services cannot require payment until they have actually completed the advertised service. Under the Fair Credit Reporting Act, borrowers are allowed to question any record in their credit history file, and the complaint must be investigated. Negative information will be removed only if the investigation determines a mistake has been made by the reporting agency. Accurate information cannot be removed from someone's credit history; only time can heal those problems.
Free Credit Reports
Consumers are entitled to one free credit report annually, from each of the three agencies. It's also possible to obtain a free copy of a credit report each year if someone's unemployed and plans to look for a job within 60 days, they're collecting welfare, or a report is inaccurate because of fraud. Consumers can also get a free copy of their report if they've been denied credit within the last 60 days.
Obtaining a Car Loan
Just because someone has bad credit, doesn't mean they won't be able to get a car loan. Lenders have their own credit standards, and not all of them will look at someone's credit history the same way. Some lenders will focus on more recent trends to evaluate the risk level for a loan. These companies may grant a loan if recent bill payment history has improved. It may be worthwhile to contact lenders informally to discuss their credit standards. Anyone that's looking for additional help can always contact a credit counseling service. Counselors will arrange payment plans that are realistic to the borrower, and acceptable to creditors. In our article Credit Card Debt Elimination, we discuss alternatives such as debt consolidation and budgeting. All of these tactics can help debtors to make their monthly payments on time, and that's the single best way to improve a score.
Fixing a Credit Report
If an error is found on a credit report, it's a good idea to get the error corrected as quickly as possible. Under the Fair Credit and Reporting Act, all three agencies are responsible for correcting inaccurate reports. To learn how to correct a report, as well as obtain the contact information for all three major credit rating agencies, take a look at our article: Fair Credit Reporting Act.
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