The green-eyed monster can't help but rear its ugly head when you see your family or friend buy a fantastic vehicle through a car loan. But for some reason, you don't have the same luck in getting approved for credit for your dream vehicle. Unfortunately, financing for cars with bad credit could feel like a mission impossible, so it looks like turning your vision into a reality could be very hard.
Your credit score is a vital measure of your financial health. The number tells financial institutions and lenders how responsible you use credit. The rule of thumb: The higher the score, the more likely you could be approved for new loans or lines of credit since you are considered a low-risk borrower. More importantly, a good credit score gives you better deals like lower interest rates, longer terms, and even perks for the money you borrow. As a result, having good credit could save you thousands of dollars over time.
In contrast, poor credit means you pose a higher risk, so few lenders are inclined to give you a loan. And those who do agree to lend you money give you very high annual percentage rates to cover their potential losses in case of default. If you want a good deal on your vehicle (perhaps you've already looked at the invoice price here of the make and model you want so you know exactly much you are willing to pay), but worry it could be daunting due to bad credit, try holding off on buying the car for now and consider improving your credit score first. Here are some ways to do so in order to turn your loan fortune around.
Know Your Actual Credit Score
If you're set on enhancing your credit score for a car loan, you must have an idea of what the actual figure is. You can't improve what you can't measure. Check your credit history and pull a copy of this report from the three credit bureaus—TransUnion, Experian, and Equifax. You can take advantage of free reports annually through AnnualCreditReport.com. When you see your credit report, it comes with a score and a compilation of your credit history.
Your credit score is determined by several factors like payment history, old credit accounts, credit mix, credit usage, and new credit inquiries. You can see what helps or hurts your score upon reading the report. Habits that help you are on-time payments, minimal inquiries for new credit, low balances on credit cards, old credit card accounts, and different lines of credit. On the other hand, collections, late payments, missed payments, high credit card balances, and judgments pull down your credit score.
Dispute Any Mistakes
After reading through your credit information, check for accuracy and look out for errors that could be dragging your credit score down. For instance, you could have paid off a personal loan, but the report doesn't reflect that. The report could also mention you applied for a loan, which you never did. These errors hurt your credit score and keep you from owning your dream car.
If you spot any mistakes, dispute them by phone, online, or mail. Indicate that the report you received has erroneous information. From there, the credit reporting agency will rectify the mistake by contacting the lender or creditor to investigate what happened. If the information on the report is wrong or the data cannot be verified, the bureau will strike it off the report, improving your score.
Stay on Top of Your Bills
If there are no errors on your credit report, you must work on improving your credit score. One of the primary factors influencing your credit score is your payment history. If you have past due accounts or frequently make late payments, your lender will likely cite your account for delinquency, so your score plummets.
In contrast, paying timely debts on time works in your favor. For instance, having your old student loans on record, which you pay for diligently, shows you're responsible. Make a habit of avoiding settling accounts past their due date. Never make late payments. Some tips for that are:
- Create a paper or digital file that helps you keep track of all your bills with their corresponding due dates
- Set a phone alarm or reminder for your bill due dates
- Consider automating some of your bills with your checking account
Settle Any Outstanding Loans
If you have defaulted on any loan payments, you must settle these delinquencies first if you're intent on improving your credit score. It may seem challenging to settle outstanding loans if you're strapped for cash. But there are ways to improve your cash flow. For starters, you can start a side gig to boost your income stream. Alternatively, there could be a lot of treasures hidden in your closet. If you're intent on improving your score, you must make sacrifices. You could sell unused items in your possession via Craigslist or eBay to help pay for loans and credit card bills.
Another option is debt consolidation by using a bank loan or credit union offer to pay all your high-interest credit card debts. Some have promotional offers that provide 0% interest. Just take note of transfer fees, usually a certain percentage of the overall amount. This strategy means you only have one payment to monitor and could pay down your debt faster. In turn, it shows how well you utilize credit and could improve your score.
Be Prudent in Making Future Expenses
From there, be prudent and frugal with future purchases. Use your credit card and other loans prudently. Avoid maxing out your card limit each month with unnecessary purchases. It would help to track your expenses to see what areas you can cut down on. Staying diligent and paying any arrears on time will improve your credit score.
If you're struggling to make payments for your credit cards and other loans, ask yourself if you can make a big-ticket purchase like a car. You must be able to commit to making the monthly payments given your income and other existing obligations. With proper financial planning and discipline, you could improve your credit score over time and get approved for a car loan. Soon, you'll find yourself sitting in the driver's seat of your dream vehicle.