Bad Credit - It is Not the End of the World
Bad Credit – It is not the end of the world!
Bad Credit – It is not the end of the world!
This is Part One of a short series on credit, car buying and how to survive the experience.
Bad Credit - It is not the end of the world. It is not the best-case scenario – but don’t give up. I will tell you that if you have poor credit, your choice of dealers can make a big difference. A dealership that maintains good relationships with its lenders and has salespeople that care enough to work hard on your behalf can make the difference between getting a car or not. I know this is true, I have seen it happen. People that have been turned down just might have a chance to trade if they work with the right people.
Ten years ago, most people did not even know that they had a credit score. With all the credit protection and identity theft programs out there now, most people not only know that they have a score, but most have a pretty good idea of what that score is.
The problem is that although they know the number, they only have a vague idea of what the score means and how it affects them. Most people generally know that interest rates are higher when your credit scores are lower – and if your score is low enough – you can’t get a loan at all.
Let’s look a bit deeper. The FICO score is just a number calculated by a company that uses its formulas to analyze the three credit reporting agencies. It is important to note that there is more than one FICO score. A mortgage company may be looking for different things than a car lender. FICO has different products designed to meet the needs of its lender clients.
Generally, the FICO score is made up of 5 factors. 35% is based on your overall payment history. 30% looks at how much available credit you have. Are your cards maxed out? This is where that plays a role. 15% looks at the length of your credit history. This is what can hurt young lenders, or people that have not opened accounts until recently. 10% of the score is based on recent credit accounts opened. Finally, the last 10% (I hope that adds up to 100) looks at the types of credit you have – a mortgage, car note, bank loans, Master Card and Visa, store credit cards. This is just a basic breakdown. Lenders can get FICO to use all types of sophisticated formulas to create a custom calculation for their business.
What are the credit raters looking at?
Where does FICO get their information? There are three credit reporting companies. They are Equifax, TransUnion and Experian. Each of these is likely to have different rating for you and, in some cases, there can be 50 or more points different. Some lenders take the lowest, others take the middle and some just look at only one particular report and may not know you have a higher score on another agency. This is one area where a committed finance manager can help. He knows which lenders will accept a single report and so he can make sure your best number goes to the lender.
So, you have “crummy” credit. That is not too surprising, millions of people do. Texas has the fourth lowest average credit score in the nation and Oklahoma is right there at fifth. What does that mean when you want to get a car? Remember that the score is a representation of your risk as a borrower. The lower the number, the higher risk, and the higher interest rate you will pay.
Think about it though. You have bad credit and you are driving. You have friends that you know have even worse credit than you and they are driving. It seems like there is a car lot on every corner. There is a whole industry in low credit score financing. Many small lots carry the note themselves, or they guarantee your note with a lender. These are going to be lesser priced cars and the highest of interest rates. That most likely puts you in a car that is prone to have repair bills and you are paying a premium price for the privilege.
If your credit is absolutely terrible, you may have no choice but to go to a local lot. However, even people with bad credit can get into a decent car. I see it every day. People that have poor credit get financed and get new or newer used car all the time. It may take some work to get it done, and that is where having a good dealer can make all the difference. The dealer likely has relationships with various lenders and can ask for a “favor” now and then. That might save you one or two points on your car loan. Also knowing which lenders are likely to lend and knowing how to properly present you as a customer can be the difference between getting that new car or heading home in the old one.
So, here are a few tips:
Choose your dealership carefully. If you have a good hard-working salesperson you have a better chance of getting a car. They are also likely to have a staff that thinks about unique ways to make a deal work. You want a dealership where the sales manager and finance manager are committed to serving their customers – not just ringing up the easy sales. Sometimes, a car may not work for a lender because it has too many miles on it. A good salesperson will know that and suggest cars that are more likely to work given your credit situation.
Look at your credit report. You can do it free periodically. Take the time to do it. Most people have one or more incorrect or completely mistaken entry. Getting these off may help tremendously. Doing this will also let you see what potential lenders are looking at – you need to know this. Finally, by monitoring your credit periodically you will learn about how the system works and what is really important. I have heard that credit monitoring “is only for rich people.” That is so wrong. If your credit is challenged, you need to keep ahead of it.
Finally, do not lose hope. Credit issues are a pain in the butt, but they do go away with time. And if you have a low score, you don’t have to get to an 825 to do business. Every little bit helps. By adding 20 points here and there you are well on your way to better credit.