Buyer Question: What is a credit rating and why is it important to know?

Comment: A credit rating is a financial measurement which gives potential lenders an indication of a buyer’s ability to repay their vehicle loan.  Today major credit rating organizations e.g. Equifax, Experian, TransUnion use a credit rating scoring system called FICO. A buyer’s FICO score can range from 300 to 850. 

The buyers FICO score is calculated using five categories of credit data. According to Fair Isaac Corporation, the firm who developed the scoring model, the categories and their respective weightings are: Payment History (35%), Amounts Owed (30%), Length of Credit History (15%), Types of Credit Used (10%) and New Credit (10%).

The FICO score will determine the interest rate a buyer will be charged for a vehicle loan.  The higher the FICO score the lower the interest rate.

The following chart is a general representation of a buyer’s “Monthly Payments” and “Total Interest Paid on a Loan” based on different FICO scores.

Example: $15,000, 60 Month Vehicle Loan.

The following steps take approximately one hour. 

1. FICO scores may be ordered from myFICO at www.myfico.com or Consumer Info at www.consumerinfo.com.
2. Order FICO scores for each person who will be listed on the loan agreement. It is wise to order the package which includes scores from the three major credit organizations.  The cost is less than $40 per report.
3. Check the credit reports for errors.  Errors can be caused by several reasons e.g. Clerical input mistakes, Mistaken Identity with another person with the same or similar name, Identity Theft, Credit Fraud.
   If you discover errors contact the credit bureau immediately.  Correcting errors will raise your score, thereby, lowering your future monthly payments and interest cost.
   Equifax             800-685-1111
   Experian           888-397-3742
   TransUnion        800-916-8800
4. If your credit score is low you might consider delaying the purchase of your new vehicle until your score improves.  This can be accomplished by paying bills on time, reducing credit card debt and reducing total debt.

Classic Dealership One-Liners regarding your credit reports 

“Hmmm … your credit scores are lower than we expected.  Our financing source is going to expect a higher interest rate on your loan.”

Comment: Did you obtain financing from an Internet source, a local bank or a credit union before going to the dealership?

 “We only use (name of another credit bureau) since they have more accurate information.”

Comment: Did you order the FICO package which includes the credit scores from the three major credit organizations?  The statement is irrelevant if you obtained financing before going to the dealership.

“Your credit rating is great but your spouse is dragging down your score.”  

Comment: Did you include your spouse’s credit report in your Buyer Information Folder?  The statement is irrelevant if you obtained financing before going to the dealership.

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