If you’re on your way toward building a better credit score, there are some key definitions you’ll want to know. It’s always a good idea to be aware of your credit score and how it’s calculated. This will help you to stay prepared if you need to finance something – like a car.
Credit Basics
When you apply for a loan, lenders look at your credit score. The most common credit score used by lenders is the FICO score (the national credit bureaus – Experian, TransUnion, and Equifax – created a different scoring model called VantageScore). The FICO score – a number between 300- 850 – is one thing helps lenders determine whether or not to extend credit to a borrower.
A credit report is a detailed record of your credit use and history. A good practice is to monitor your credit year round to ensure accuracy and guard against identity theft. Everybody is entitled to get one free credit report from each of the credit bureaus every 12 months. You can access them by visiting www.AnnualCreditReport.com.
Common Credit Terms
Borrowers need to know what they stand when financing is on the line. There are terms you’ll often hear, but you may not have a clear understanding of their meaning. Having a working knowledge of common credit terms can make the world of credit easier to navigate.
Inquiry – There are two main types of inquiries, hard and soft. A hard inquiry occurs when consumers apply for credit and a lender or business “pulls” your credit report. This type can affect your credit score, but any drop is typically minimal and temporary. A soft inquiry – for example, checking your own credit – doesn’t impact your credit score.
Credit Mix – This means all your different types of credit. Having a good credit mix impacts your credit and makes up 10 percent of score. This mix includes things like credit cards, student loans, auto loans and mortgages.
Payment History – Payment history makes up 35 percent of a credit score, and is a big portion of a credit report. It includes all your accounts and their payment status, specifically if you’ve stayed current with payments. This helps determine whether or not a borrower can get approved for a loan (and at a decent interest rate).
Credit Utilization – This is how much of your available credit you’re using. Lenders look to credit utilization as an example of how potential borrowers manage debt. Keeping your credit utilization at 30 percent or lower puts you in a better position. To calculate your credit utilization, simply divide the total of all your credit card balances by your total credit card limits. Multiplying the answer by 100 will give you the percentage.
Installment Credit – Auto loans, mortgages and student loans are all examples of installment credit. These are loans that occur for a set amount of time, or term, and are repaid with regular (usually monthly) payments.
Revolving Credit – This is a credit line that a consumer can use without having to pay off the entire balance each month, such as credit cards and retail cards. Borrowers have a set limit, but typically only a minimum payment, based on the balance, is required each month.
APR – The annual percentage rate, or APR, is the interest rate plus fees a consumer pays throughout the year on credit cards and loans. Because credit cards and loans can include different types of fees along with the interest rate, it’s a good idea to check the APR carefully to know what you’re actually paying in interest charges.
The Bottom Line
If your credit is not so hot, taking out a subprime auto loan can be a great way to starting building it. So, if you’re looking to pump up your credit, or if you’re just in need of car, knowing your way around the confusion of financing terms can be a big advantage. Another big advantage to getting an auto loan with bad credit is having the right dealer on your side.
Auto Credit Express can help navigate you to a local special finance dealer that has lending resources available to work with people in challenging credit situations. Let our knowledge be your guide, simply fill out our free, no-obligation online auto loan request form today!
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