How to Interpret Your Credit Score
Credit scores can be a baffling business to many consumers, but few factors are more important when applying for auto financing. Learn how to read your credit score here.
About Credit Scores
The rates and terms of bad credit car loans are largely based on your credit score, which is a number that reflects your creditworthiness based on an analysis of the data your credit report contains. Credit scores basically help lenders gauge the amount of risk they're taking by lending to you. Credit scores will determine whether you qualify for certain loans, as well as the interest rates you will pay on bad credit car loans and other loans. The most common assessment of creditworthiness is the FICO score, which is based on a formula that assigns different weights to various factors in your credit report.
Five Factors of Credit Scores
When you apply for bad credit car loans, lenders will look at your FICO credit score. Your FICO score is determined based on the following five factors:
- Payment history: 35% of score. Your payments on your credit accounts will comprise the bulk of your score. Paying on time is the most critical factor here, with recent late payments hurting you more than old late payments.
- Outstanding balances: 30% of score. This factor basically measures how much you owe relative to your credit limits. If you are "maxed out," or borrowing close to all of your credit capacity, this will hurt your score.
- Credit history: 15% of score. This measures the length of your credit history. If you're just starting to build your credit history, there isn't much you can do to improve on this in the short-term.
- New credit: 10% of score. The new credit you acquire affects your score. Submitting many applications for new credit is one of the easiest ways to hurt your credit score. Try to avoid applying for a lot of new credit around the time you apply for bad credit car loans.
- Credit type: 10% of score. This refers to the variety of credit found in your credit report. Lenders usually like to see you diversify your credit usage to demonstrate that you can use many types of loans responsibly. This usually means that you have a good mix of credit card accounts, installment loans (bad credit car loans, mortgages, etc.), and retail card accounts.
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Once you've done your shopping for bad credit car loans, you'll probably have to negotiate with a car dealer at some point.
