Steps to Help Improve Your Credit Score

used-cars-for-saleGetting approved for car loans for poor credit situations can be challenging based on your current credit score. If your score is too low, car dealers and lenders are quick to decline your loan application because they simply feel you are too much of a credit risk.

Young adults with no credit can run into the same challenges as people with bad credit when they apply for an auto loan. The reason why no credit can be just as troublesome as bad credit is that the individual has not yet established their creditworthiness. Unfortunately for them, car dealers and lenders are also equally inclined to deny their loan applications.

Whether you currently have poor credit or no credit, let’s review some credit basics and look at ways you can improve your credit score. Then we will examine different options available that could still qualify you for no credit check auto loans.

How Credit Scores Are Calculated

credit-score-checkEach of the major credit bureaus has a different method for determining your credit score. As such, the generally accepted method used for scoring is the FICO method. The algorithms used to determine the score are highly guarded. However, there are some essential factors used in the scoring processes, including:

  1. Percentage of on-time payments. Making on-time payments is one of the major factors used to determine your credit score. If you have late payments, missed payments, and defaulted accounts, it will drastically reduce your credit score.
  2. Percentage of credit used on existing credit lines. This factor is also another major factor used to determine your credit score. If you have high balances on credit accounts, this will adversely affect your score.
  3. The length/time of existing credit lines. The age of your credit accounts lets creditors know how well you can handle credit. It is often used as an indication of your reliability to make on-time payments. This is also another major factor used to calculate your credit score.
  4. The amount of credit available compared to the amount owed. The dollar amount of credit available on credit lines lets lenders know how responsibly you use credit. This is a minor factor, as it is related to the percentage of credit you have available.
  5. The number of recent inquiries over the past two years. When you have a high number of inquiries, it can lower your credit score. This is because lenders have no idea if you were approved for credit by another lender, especially if you submit multiple applications in a short period of time. Fortunately, this is a minor factor used to calculate your score.
  6. The number of new accounts opened over the past two years. This is another minor factor used to calculate your credit score. If you open too many accounts in a short period of time, it could raise your ability to make on-time payments to your other creditors.

Keep in mind, these are just the primary factors used to calculate your credit score. Other negative items on your credit report, like repossessions, bad-debt charge-offs, an excessive number of collection accounts, and bankruptcy also have a negative effect on your credit score.

How to Improve Your Credit Score

Before you can develop a plan to improve or establish credit, you need to know what is on your credit report. You are entitled to receive a free annual credit report from all three credit bureaus. Your reports will show details about:

  1. Credit Accounts
  2. The Types of Credit You Have
  3. Collections
  4. Bankruptcy
  5. Repossessions, etc.

couple-looking-at-loan-documentsThe main thing you want to do is to review all the items listed on your credit report and verify they are truly yours. If you find anything that is reported which is not yours, you should complete a dispute form and submit it to the appropriate credit bureau. Most disputes are able to be completed online.

One thing you will notice is that none of your three reports shows your credit score. There are several different ways you can get your current score:

  1. You can pay a fee to have it displayed alongside your three free credit reports.
  2. You can sign up for free FICO scores through your bank or credit card company if they offer this service.
  3. You can subscribe to a subscription-based service and pay a monthly fee to have access to your score instantly.

Even if you forgo obtaining your credit score, you can still use your credit reports to develop a plan to start improving or building your credit score.

How Credit Scores Affect Auto Loans

While it is possible with bad credit to get an auto loan, the one thing you will quickly notice is the higher interest rates. Lenders will charge more interest because they are taking a bigger risk. If you can wait and work on improving your credit score first, you can get much better interest rates as your score increases.

1. Make a list of all collection accounts and the original creditor.

Most collection agencies will want you to pay them for the debt. It is better to pay the original creditor directly, especially if it was a loan or credit card. Once you resume payments on the account, even though it is closed, it can help improve your credit score when you pay as agreed and on-time since the original creditor will report the payments to the credit bureaus.

2. Establish a payment plan to pay off your outstanding credit cards.

It is a good idea to make a list of your current card balances and interest rates. Then you can decide to try to pay off the high-interest cards first or concentrate on the ones with the lowest balances. For most people, the second method is much easier to stick with.

The objective here is to pay more than the minimum due on the card with the lowest balance, even if it is only $5 or $10 more a month. Then, once that card is paid off, take the amount you were paying on it each month and add it to the minimum payment you are making on the card with the next lowest balance.

As the cards are paid off and your available balances start to increase, you will notice your credit score starts to increase. You do need to avoid using the cards; otherwise, you will not get them paid off.

3. Do not cancel any paid-off accounts, regardless of age.

One mistake some people make is to request that a previously paid-off loan be removed from their credit report. This actually hurts your score. It is better to leave paid-off loans on your report, even if you paid them off slowly. In addition, do not cancel credit cards with $0 balances, as this has a negative effect on your credit score.

clock4. Make payments on time on all your accounts.

Even if you cannot afford to pay anything extra, it is better to pay the minimums owed each month. When you make payments on time, it shows future creditors that you pay as agreed.

5. Set a goal to keep all available credit balances at 30% or less.

Your credit score will not be hurt if you have small credit balances of 30% or less of your available limits. For instance, if you have a credit card with a $500 limit, you should not owe more than $150 on it.

6. As your credit improves, request credit line increases on credit card accounts.

Getting a credit line increase does not mean you should use it. Stick with the 30% or less goal. Rather, the more credit you have available, the more it will boost your available percentage, which has a major impact on raising your credit score.

7. Have a mixture of credit types on your report.

Ideally, you should strive to have a mixture of credit cards, a car loan, and a mortgage on your credit report. When you diversify your credit, it shows lenders you are responsible with both secured and unsecured credit. Plus, this diversity can boost your credit score.

8. Ask to be added to someone else’s credit card account as an authorized user.

Being an authorized user on someone else’s credit card is reported to the credit bureaus and can increase your credit score, so long as they have good credit.

How Credit Scores Affect Auto Loans

While it is possible with bad credit to get an auto loan, the one thing you will quickly notice is the higher interest rates. Lenders will charge more interest because they are taking a bigger risk. If you can wait and work on improving your credit score first, you can get much better interest rates as your score increases.

How to Get Approved: Auto Loans for Poor Credit When You Cannot Wait

pawning-used-carThe easiest way to buy a car and get approved for a car loan for poor credit situations when you need to buy a car now is through one of our loan program options, here at Massa Auto Pawn & Sales. We understand you need a car to get back and forth from work, run errands, and get the kids to and from school events.

We can attempt to set up financing through your bank or credit union if you have so-so credit and they are willing to approve your car loan. If not, our next option is our “Buy Here Pay Here Financing.” This program is where you make either bi-weekly or monthly car payments directly to us.

We work with you to determine a payment that can fit your budget and which allows you to make your payments on time while getting to enjoy driving the vehicle you purchased. 

Our third option is our “Layaway Financing.” With this program, you pay a down payment to hold the vehicle you want to purchase until a mutually agreed-upon delivery date. You are free to make payments at any time leading up to the delivery date on the contract.

This option works well if you are expecting a large amount of money sometime in the future, like your tax return, but want to hold the vehicle you want to buy until your money arrives. Should you not get your cash in time, we can work with you to either convert you into our “Buy Here Pay Here Financing” or discuss options on extending the “Layaway Financing.”

While you can get car financing with bad credit quickly, here at Massa Auto Pawn & Sales, we still encourage you to take steps to improve your credit score. To check out our latest inventories of quality used vehicles, please feel free to stop by your nearest Massa Auto Pawn & Sales location today or contact us at 720.598.0081 now!