I thought I would take a few minutes and write an article about how credit cards can affect your credit report and how your credit score can affect your interest rate on your car loan. Many people will come to me to get an auto loan and they are amazed when they discover that their credit score is not as high as they thought it should be. This is often because they will have a credit card maxed out to the top of the credit amount limit that they have been offered, instead of using no more than 30% of what is available to them. This affects their credit score dramatically. They would be better off having two credit cards and splitting the balance between the two of them to keep it at 30% or less and dropping the total credit limit available.
For example, if you have a $10,000 credit line of your VISA card, you do not want to have more than $3,000 on that card at any given time, so that it doesn’t drop your credit score. You would also be better off to have a $5,000 limit instead of $10,000, if you don’t have $3,000 on the card that you need to use. The same is true for your other cards that you might have. In particular, the consumer cards that you might get at an electronic or furniture store. What often happens is someone will go to the store to buy some furniture for their new home and they will be given a $15,000 line of credit and then they buy as much as they can to max out the credit card. They then come to see The Cool Car Guy to get a vehicle and they are shocked that their FICO score has dropped from 750 to below 700, which can greatly affect their purchasing power, based on the interest rate that they will now qualify for to get an auto loan.
I recently heard that home buying is going to go the way of auto buying where the interest rates will be tiered like auto loans. Let me explain how this works with a Credit Union and a real life example. I had a client recently that came to me and he thought he had a 750 FICO score when he had pulled his credit bureau online. His report was through TransUnion, but when I pulled his credit report through Experian it was only a 685, so instead of getting a loan for 2.99% the credit union was at 7.94%! That’s a huge difference in purchasing power. Fortunately for him, I could pull a TransUnion credit report and his FICO score had not been updated yet with TransUnion to get closer to what Experian was reporting, so I was able to get him a rate of 3.49% instead of 7.84%.
His rate was still not as good as someone with a higher score who would qualify for 2.99%, but he was still able to get the vehicle he wanted at the price that he wanted, so it worked out in the end. If he had gone to that credit union by himself and got qualified like most of the “experts” suggest that people do, he would not have gotten the 2.99% rate because banks and credit unions are in business to maximize a profit on their interest rates. The chart below from ComplexSearch.com illustrates how people have credit scores that vary drastically.
Some banks and credit unions though will only use a specific bureau and not all dealerships have access to lenders like I do through the dealerships where I have my license placed, as an Independent Contractor. This is one of the things that people often overlook about the services that I can offer. They are only shopping the price of the vehicle and not the entire package.
The people who really get creamed on interest rates because of their credit challenges are people who have had a bankruptcy or have student loans that are not paid off. I’ve see interest rates of 21% that people pay on auto loans through a number of dealerships. They like the salesperson and think that they are getting a great deal, but it is costing them more money than they realize. Had they worked through me and I could have obtained a rate of say 19% based on their credit score, I would have saved them about $1,500 that they are giving to the bank for doing the same loan on the same vehicle.
Sometimes people with credit challenges fail to realize that they could have gotten an even lower rate on a different vehicle than the one they are wanting to purchase. They get too emotional about a specific vehicle when they could be saving money on a vehicle that makes more sense for their situation. Again, this can be significant as well. At 18% the difference is almost $2,000 over the term of the loan compared to 21% and usually these are people who really need an additional $2,000. In fact, if you’ve been in a high interest rate loan for six month or a year and you’ve been paying your loan on time, you should be calling me to trade it in on a different vehicle. This way you will not be paying such a large amount in interest based on your credit score.
Managing your credit report is very important today. The key is to get as low of interest rate as possible, so that you’re giving the banks less money, pay off your consumer debt and keep your FICO score healthy. If you have questions or comments let me know and I’ve included a loan repayment calculator, called Pre-Payment Calculator here at CoolCarGuy.com under the links section on the right. You can put in your loan and calculate how much of an extra payment will help accelerate your auto loan, which I plan to write a different article about here later this month.
If you want to save time, money and hassle for your next vehicle give me a call and I can put you in a better position financially with your automobile situation. Be sure and sign-up for my notifications when I post new articles here. Have a safe and healthy 2014!
Auto Consultant – John Boyd: The Cool Car Guy
John is an auto consultant with his license at a car dealership in Denver, Colorado. He can help you save time and money on any make or model, new or used, lease or purchase – nationwide! Call or email John about your next vehicle! firstname.lastname@example.org or Twitter @coolcarguy