As an adult, you have a credit report that summarizes how you've handled your credit accounts which are reviewed and scored. Think of it as your credit report is your new report card, and your credit score is your new GPA. A negative inquiry or delinquency on your report can drastically lower your credit score. This can take time to restore which you might think will ultimately put a hold on many parts of your life, like financing a car.
If your fear is getting denied a loan because of bad credit, here's an answer:
You don't need a specific credit score to be approved for a loan at Skyla Credit Union
How?Because we review more than just your credit score, we review multiple factors, including your employment, income, and other financial assets. And we've been doing this for more than 50 years.
I'm your friend and financial expert here at Skyla ready to give you the tools and tips you need to help you reach credit score success and get the auto loan you need to buy your new car. I'll share everything about credit scoring, including how your credit score is calculated, what to expect with a low interest or high-interest rate, and more. Plus, there's a freebie for you to help with your credit report and scoring!
Ready to dive in?
understanding your credit score
WHAT IS A CREDIT SCORE?
It’s a three-digit number ranging from 300-850 based on a credit report, which is information formulated by three reporting credit bureaus or agencies - Transunion, Experian, and Equifax. The credit score determines your borrowing power or level of receiving a loan. The credit agencies use different credit scoring systems to determine your score. The most common credit-scoring system used is the Fair Isaac Corporation, which you know as FICO.
Here's a look at how FICO scores are rated, with the percentages based on the average score for Americans:
HOW IS MY CREDIT SCORE CALCULATED?
Your credit score is measured by multiple factors. Here’s how FICO calculates your score:
Payment History:This includes your account payment information, including any delinquencies and public records. Late payments can drop your score more significantly since your payment history makes up 35% of your FICO Score.
Amount Owed:This looks at how much you owe on your accounts. The amount of available credit you’re using on a credit account is heavily weighted. You want to keep your overall use below 30% of your available credit for the best score in this category since your amount owed makes up 30%of your FICO Score.
Length of Credit History (Age of Accounts):The FICO system looks at how long ago you opened your accounts since account activity. Creditors like to see some experience. The length of credit history makes up 15% of your FICO Score.
New Credit (Accumulation of Debt): The FICO system looks at the many credit accounts that were recently opened in 0-24 months as well as the number of hard inquiries made by lenders when you apply for credit. New credit makes up 10% of your FICO score. (Psst...the fewer credit accounts, the better.)
Mix of Credit in Use (Types of Credit): Do you have credit cards, auto loans, installment loans, revolving loans, or a mortgage? The combination of different types of credit you have, the better your score. This shows you can handle different types of loans and various types of debt. The mix of credit in use makes up 10% of your FICO score.
CREDIT SCORING BUREAUS:
Reporting credit scoring bureaus (Experian, Equifax, and Transunion) don't actually make your credit score? The bureaus just keep track of what your credit file contains, and scoring systems like FICO determines your true score which translates it into a three-digit score. Psst… There are many FICO score versions for different types of loans. Check out myFICO.com to see what your preferred lender may use when reviewing your auto loan application.
QUICK TIP: At Skyla, we determine an individual's creditworthiness using Equifax. The Equifax Bureau generates Beacon Scores (another fancy term for credit score). The Beacon Score still reviews an individual's payment history and potential ability to repay the loan if approved.
what credit score do i need for an auto loan?
Honestly, there isn’t one specific credit score needed to receive an auto loan. But, the higher your credit score, the better chance you’ll have at receiving a low-interest rate.Why? Because lenders need to know you can be reliable when it’s time to repay the loan.
what interest rate can i get with my credit score?
If your credit score is in the high 700’s, you can expect a lower interest rate which gives you more buying power (meaning you can receive a higher loan amount). A borrower can expect a higher interest rate with a low credit score below 600.
In the example below, check out Member A and B’s buying power when they receive their auto loan based on their credit score with a loan term of 60 months.
More Buying Power
*Rates are for demonstrative purposes only.
Notice how both members make the same car payment; however, Member B can afford a higher loan amount with a low-interest rate because of B’s 730 credit score. Psst… Want to calculate your own interest rate? Simply check out the blog article for How Is My Interest Rate on an Auto Loan Calculated.
how does my auto loan affect my credit score?
Long term, taking out an auto loan can positively impact your credit score. When you first apply for your loan, lenders run a hard credit inquiry to check your credit report. A hard inquiry or a hard credit pull lowers your score by a few points. (But don’t worry, a single hard inquiry disappears and drops off your credit report after a few weeks.)
QUICK TIP: Avoid applying for multiple lines of credit at the same time or even in the span of a few months. Why? Lenders will consider you to be a risk when determining your eligibility for an auto loan.
Maintaining on-time payments on your auto loan for a period of time helps increase your credit score. Simply missing a payment can negatively impact your credit score. You can establish a credit score from your loan with a payment history of six months plus the activity reported in the last six months.
HERE’S WHAT I MEAN…
Let’s say you receive a $10,000 credit card from your preferred lender. You actively use the credit card for different expenses and make on-time payments. Your lender later reports each payment made towards the credit card to the credit reporting bureaus (Equifax, Transunion, Experian). That activity reflects on your credit report which helps you establish a credit score.
how to clean up and improve my credit score?
Companies like Credit Repair and Experian offer credit repairing services with a possible fee where they do the work for you to boost and improve your credit score. If you want to do this for free, you can start with the following:
Get your full credit reportto view your reporting history and remove any inaccurate inquiries. Legally, you can retrieve your full credit report for free every 12 months from Annual Credit Report.com
Pay off or pay down your credit cards to lower the balance and overall credit usage
Don’t close your cards since it may decrease your average length of credit. Have you had a bad experience with a credit card? If you want to avoid going down the same road or paying an annual fee, closing the card may be the better option for your situation.
Make on-time paymentswhenever possible for all of your loans.
Slow down and don't open too many new lending accounts too quickly to give your credit time to rebuild.
When fixing your credit, don't feel like it's something beyond your control. It’s very much within your control. It may not be instantaneous, but having a good credit score is absolutely achievable, and we're happy to help!
- Susan Espinosa, VP Member Experience at Skyla Credit Union
what actions can hurt my credit score?
Missing Payments:This affects your credit score by 60-100 points.
Shopping for Credit Excessively: Plan for no more than 2-4 inquiries per year.
Reaching the Limit on Credit Cards:You lose approximately 1 point for every % used on your credit card limit.
Opening Numerous Lines of Credit in a Short Time Frame:Look into no more than two accounts per year.
Closing Credit Cards Out:This could lower your average length of credit which can hurt your score.
Borrowing from Finance Companies:Anytime you borrow, it allows the lender to run your credit report which results in a hard inquiry that could lower your credit score by 5 points.
here's what to remember with credit scoring and auto loans:
Remember, there is more to just the credit score that is factored in when determining a loan. There isn't a specific credit score needed, but the level of interest rates depends on how high or low your credit score is. The higher the credit score, the lower the interest rate. Want to calculate your own interest rate? Check out the blog post How Is My Interest Rate Calculated to learn how.
One last thing...
When working to improve your credit score, know that it takes time and doesn't happen overnight. So be patient and understand that a good credit score is achievable. At Skyla, we can help you achieve those goals. To get started, send us an email, give us a call at 704.375.0183, or you can visit us at any of our branches.
ready for your freebie?
Ready to reach your credit score goals? Download the free Credit Score Guide to get started.
As the Content Specialist and author of the Learning & Guidance Center, Yanna enjoys motivating others by uncovering all that's possible in the world of finance. From financial tips and tricks to ultimate guides and comparison charts, she is obsessed with finding ways to help readers excel in their journey towards financial freedom.
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