A car is one of the biggest purchases you’ll ever make, and it can be a serious financial commitment. It’s worth the effort to shop for the right car at the right price, but that’s not the only important consideration. Taking the time to prepare your credit for the purchase may help you save significant money on your loan terms.
When buying a car, credit health is very important. Here are some tips to get your credit as healthy as possible as you start your car search:
Know what’s in your report
An important first step before making a major purchase is knowing where you stand. Get your credit report and read through it to make sure it’s an accurate representation of your history with credit. Although rare, inaccuracies can happen. You can dispute items that are inaccurate or the result of fraud.
Check to be sure you recognize your personal information and that account information is accurate. Lenders tend to provide updates once a month. If you recently made a payment on a credit account and don’t see it reflected on your report, it may just take some time for it to show up.
If you’re looking for help, we’ve created a guide on how to read your credit report that breaks down each major section with important items to look for.
Pay down credit card balances
Your utilization rate, which measures how much of your available credit limit you’re actively using, is an important factor for your credit health. Paying down your revolving credit balances, like credit cards, is a smart move before any major purchase.
Getting below 30% utilization is a good start, but the lower the better. While there’s no true “quick fix” for your credit, this is one of the easiest ways to better your credit health in the short term as you anticipate your car purchase. Keeping your balances low shows you should be able to handle the additional car payments each month.
Make all payments on time
Late payments are another major factor that can have a significant negative impact on your credit health. If you’ve missed a payment in the past, there’s no way to get it removed from your report if it’s accurate. But going forward, be mindful to prevent more negative marks from appearing on your report. Setting up automatic payments or creating reminders for yourself can help. A history of on-time payments can give lenders confidence you’re capable of consistently paying bills promptly.
Limit new inquiries as much as possible
If possible, it may be a good idea to avoid seeking out any additional credit as you start looking for an auto loan. Hard inquiries, which can appear on your report when you apply for new credit, aren’t as impactful to your credit health as your payment history or utilization rate. But they could be a signal that you’re seeking out additional credit, which may give some lenders pause.
Limiting new inquiries is smart, but comparing auto loan options is important too. When rate shopping for a loan, try to complete your applications with different lenders in a short time frame. While it may result in multiple hard inquiries, some credit scoring models will recognize you’re making a smart credit move and only count them as one inquiry in score calculations. This is sometimes referred to as bunching.
Credit scoring models handle bunching differently. Some require all inquiries to occur within a 14-day span, while others allow up to 45 days for rate shopping.
Before you begin your rate shopping, make sure you remove or temporarily lift the freezes on your credit reports if you have them. It's easy to forget, especially if they were placed a while ago. You don't want any unexpected delays when you're at the dealership.
What if I have a short or no credit history?
It’s possible to buy a car even if you have a limited credit history or credit in need of improvement. In this case, lenders and dealers will have specific requirements to approve a loan, which may require a cosigner or a large down payment.
Being mindful of your credit and making sound decisions in advance of a car purchase can help save some serious money. Remember, your credit is a part of your larger financial story. If you continue to practice healthy habits like keeping your debt load as low as possible and making all payments on time, not only will it reflect positively in your day-to-day finances, but your credit health should follow.