FICO Credit Score Explained
It is a common misconception that you will be approved for a car loan as long as you have a good job so that you can afford the payments and if you have money for a down payment. Automobile finance companies and other lenders consider other factors when deciding whether or not to grant you a loan. One of those other criteria that they consider is your FICO or credit score.
Credit Rating
So having money and having a high salary does not guarantee that you will get the car loan you want. Your average credit score play a significant role when adjudicating credit and it is reviewed by everyone from banks to credit card companies. They use this numerical representation of your previous borrowing history to try to determine how likely you are to pay back a new loan, on time as agreed. This number is also sometimes referred to as your credit rating.
If you were late on payments in the past or you have missed any completely, this will negatively impact your credit score. The more serious the infraction the greater the effect it will have and the lower your score will be. If you have defaulted on any loans, had a vehicle repossessed, or declared bankruptcy then you will consequently have a very low credit score. The lower your score the more difficulty you will have when you go to apply for credit in the future.
Each month, banks, credit card companies, automobile finance companies, and other lenders send a report to the credit reporting agencies such as Equifax, Trans Union and Experian, to advise them whether or not you paid your loan or credit card as agreed. These credit reporting companies consolidate the data and maintain a single record on all borrowers. That way when a new loan application is received by a lender, they can ask for a copy of this report. While past behavior is not a guarantee of how one will behave in the future, it is the best the creditors have to go on.
In addition to affecting your likelihood of approval, your credit score will also impact what interest rate you will be given. If you have honored all of your loan agreements and made your payments on time then you will have a high FICO score and you will be rewarded with a very low interest rate. Of course the opposite holds true as well. If you have a low score, but manage to still get approved for a loan (perhaps with a co-signer), then you can expect to pay a very high interest rate.
Other companies may use your credit score before approving you for their product or service as well. These can include utility companies, cell phone carriers, landlords and property managers.
How to Boost Your Credit Score
The average credit score ranges from 350 to 850. Having a score in the high 600’s to the low 700’s would be the least acceptable to be considered “credit worthy” by lenders. Of course you want to do everything in your power to boost your credit score and keep it as high as possible.
The first step to boosting your credit rating is to pay all of your monthly bills and debts on time. This means that when you receive a credit card statement and it has a “due by” date on it, then you must have your payment in their hands by this date. This is not the date that you can put your check in the mail, but the date by which the must have received it. Don’t wait until the last minute and risk your payment being considered late.
Make your payment even if the amount seems small or insignificant. I have seen clients who would receive a credit card statement with a $100 balance. The minimum payment would be $10. They would not bother making the $10 payment because they planned to pay off the whole amount the following month. While this may appear to make sense, the reality is that they credit card company would report that the borrower failed to make their monthly payment that month. Even though the payment was so small, it still counted and the customer’s credit score took a hit. All for 10 bucks.
Your credit score determines how easily you will be approved for credit and what interest rate you get if you are. It is a numerical summary of all of your past credit behaviors. If you want to get the best credit score possible or simply give your credit score a boost, make your monthly payments on time and do not overuse your available credit by maxing out the available balances.