Why Your Credit Score Matters When Buying a Used Car
Why Your Credit Score Matters When Buying a Used Car
Everyone knows that the credit score is an important part of the process when they are buying a new car. But did you realize that your credit score is just as important when you are buying a used car? Here is more information on why your credit score matters, and what it helps reveal about your financial status.
For starters, even though your credit score is summed up in a single number, there are actually many variables that go into arriving at that number. What’s more, each variable is weighed differently, meaning that a negative history in one aspect might not hurt you as much as a negative history in another aspect.
Briefly, the formula that is used to create your credit score is one that mainly considers five different factors:
- Your payment history;
- The length of your credit history;
- The kinds of credit you are currently using;
- How much of your credit is “new” credit;
- How much you owe
Your Payment History
The single biggest factor used in determining your credit score is your payment history. This factor makes up roughly 35% of your credit score. Your payment history is simply a record of all the payments you have made on your various debts. It lists the date it was paid, whether the payment was on time or not, and sometimes takes into consideration the amount you paid.
If you had a late payment, your payment history will show whether it was less than 30 days late, between 31 and 60 days late, between 61 and 90 days late, or more than 91 days late. Obviously, the more delinquent the payment, the greater the impact on your credit score. Your payment history can be used to show how reliable you are. If you frequently make late payments, it may suggest to creditors that they can expect you’ll pay them late, too. In addition, multiple late payments may suggest that you have some hidden financial issues, and that you are juggling around assets in order to keep afloat with your creditors.
As you can see, it is very important for you to make your loan payments on time. In addition to late fees, higher interest rates, and other consequences, when you pay a loan late it will show up on your credit report for at least 2 years.
The Length of Your Credit History
This factor is not as important, only accounting for about 15% of your total credit score. Creditors like to know that your recent credit activity is not a fluke. To do that, they look to see how long you have held credit in its various forms, and how you have behaved in the distant past.
Of course, everyone has to start somewhere, and creditors are aware that simply having a short credit history does not mean that you are necessarily a credit risk. Hence, this factor is not as heavily weighed as some of the others.
How Much of Your Credit is “New” Credit?
If you have recently applied for and received a significant amount of credit, it may sometimes be a sign that you are anticipating taking on a large amount of debt. As such, creditors are going to consider how much of your credit is relatively new. This factor makes up only 10% of your total credit score, so you shouldn’t worry too much if you have recently opened up a few credit cards. In the end, it won’t weigh on your credit score nearly as much as your payment history and the amount of debt you are carrying will.
How Much You Owe
Second only to your payment history, the amount of debt you owe is a significant part of your credit score. Making up 30% of the score, this factor looks at your total debt load. The reasoning is simple: if you owe more than a certain percentage of your income, it is less likely that you will be able to manage all the payments. As such, potential creditors want to know about any debt that is already in existence, as it directly impacts them.
Why Does It Matter for a Used Car?
You may wonder why a creditor would even run a credit report when you are only purchasing a used car. While a used car will often come at a discount, relative to a new one, many people do still need to take out a loan to make the purchase. And, as with any other purchase, borrowing money for a used car means that a bank or other lender has to review your financial health to determine how much you can borrow, and at what rate you may borrow it.
If you find that you are having problems getting a loan from a bank, you may consider opening an account with a credit union. Sometimes, credit unions have lending standards that are somewhat lower than those of banks. At the very least, you may find that the rates they offer are a little bit better than what your bank will agree to.
If you are interested in purchasing a used car, G&E is here to help you with every step of the process. This, of course, includes helping you understand your credit score, and why it matters to your lenders. All our cars and trucks come with a 115-point inspection, a Carfax Report, and a 30-day, 1,000-mile warranty. Stop in any time that’s convenient, and our professional team members will help you find the right vehicle from our extensive inventory, and put together financing options for every credit situation.
If you have any questions at all, please do not hesitate to ask. We look forward to earning your business!