Know Your Credit Score

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Your credit score is the most important factor determining if you'll get approved for a car loan, and what your APR (annual percentage rate) will be. If your credit score is below 680, you are "sub prime" and will pay much higher APR on your loan. Below 550, getting a car loan will be a great challenge. Which one are you?

Going to a dealer without knowing what's on your credit report is NOT SMART. Before you start comparing rates, get a copy of your credit report. You can be sure that the bank and car dealer will have your credit score before they give you terms and you don't want to rely on just what they say. Check to see that all information is accurate and up-to-date. The last thing you need is to get bumped up to a higher rate because of an error.

There are three national credit-reporting agencies, Equifax, Experian and TransUnion. Your credit report from these agencies is free thanks to the Federal Trade Commission that ruled every American is entitled to a free credit report from each agency every 12 months. To get your report see www.annualcreditreport.com.

The FICO score, named after Fair Issac Corp., the firm that developed the scoring model back in the 1950's, compares the information in your credit report to what's on the credit reports of thousands of other customers. FICO scores range from about 300 to 900. The higher the score, the better a credit risk you will be considered. The credit score is based on five factors:

1.    Payment History. A long history of making payments on time with no late payments will have the biggest impact on your credit score. The Payment History represents 35% of your total credit score.

2.    Amounts Owed. The total amount you owe and the amount you owe in relation to the total amount available also significantly affects your credit score. The Amount Owed represents 30% of your total score.

3.    Length of credit history. The credit score calculation factors in your oldest account and the average age of all accounts. The greater the length of your credit history, the better your credit score. This component represents 15% of your total credit score.

4.    New credit. Opening several new credit accounts in a short period of time can LOWER your credit score. Multiple Credit Report inquiries can also represent a greater risk, but this does NOT include any requests made by you, an employer or by a lender who does so when sending you an unsolicited, "pre-approved" credit offer. To compensate for rate shopping, the credit reporting agencies count multiple inquiries in any 14-day period as one single inquiry. The frequency that you open new accounts represents 10% of your total credit score.

5.    Types of credit in use. Your mix of credit cards, retail accounts, finance company loans and mortgage loans is considered in your credit score. The type of credit you have accounts for the final 10% of your total credit score.

Credit reports should be checked for any misinformation or outdated information. As a general rule, a negative report stays on the record for seven years, a bankruptcy for 10 years. The Federal Trade Commission's web site presents a concise summary of your rights, written in language that's easy to understand. Click here to view more information.