The idea of bad credit is something that can affect many people – knowing what it is and how to fix it can make a real difference when buying or leasing a car.
Key to understanding what bad credit means is understanding the idea of a credit report, and how that credit report generates a credit score that is then used as a guide by car manufacturers such as Ford Credit, GM Financial as to whether or not to lend you money and if so on what terms and conditions.
A credit score is essentially a number between a fixed range of two other numbers that gives a guide as to the credit rating agencies opinion about your creditworthiness. From this stands the notion of good and bad credit.
This idea of good and bad credit is to some extent true, but that is often a lot of flexibility in the system that means the numeric idea behind it should not be seen as too rigid.
Bad Credit – FICO Sore and Vantage Score
Fico is perhaps the most well-known scoring system, the other one that is also widely used is the vantage score.
Both systems use a scoring range of between 300 and 850, with the ratings system adjusted accordingly, implying that a score that is bottom to mid of this range is poor or bad credit, whilst a score ranging from the middle of the range to the top is a good or excellent score.
Naturally people look to the scoring system as almost an exact science, and whilst it’s understandable it can also be used to literally.
Whilst the scoring system is used to determine creditworthiness, a lender will often take other factors into account on the individual situation, and will also base their decision differently depending upon what the money is to be used for, and whether or not the loan is a personal secured loan or an unsecured loan.
In reality, there is also quite a lot of negotiating that can be done around the idea of a car loan, given the different components of a down payment and length of term of the loan, and options such as having a cosigner guarantee the loan.
Bad Credit – What Impacts a Credit Score
The main credit bureaus will have slightly different assessments of how to generate a credit score, and different lenders will use a credit score and relating information differently. However, there are a number of factors that affect a credit score.
Wells Fargo have given the following formula as a guide, and it is useful as such. According to them 35% of your score is based on your payment history, 30% is based on current debts, 15% is determined by your credit history, 10% is allotted to new credit applications and 10% is about types of current credit.
A lot of what affects your credit score is common sense, and anyone with a bad or poor credit rating would do well to understand the mechanics of credit and do what they can to improve their credit report and subsequent credit score.
Bad Credit and No Credit.
People often assume that these two are the same thing as a fact they are not. A lot of young people started off a working life will have no credit history, and as such may be penalised unfairly when applying for a car loan or any other type of unsecured loan or credit agreement.
But are however a number of banks and financial restrictions will appreciate the difference between bad credit and no credit and make adjustments accordingly.
Anyone who is relatively young, say under the age of 25, and is looking to buy a car is going to be hit by significant insurance costs in addition to the cost of buying or leasing a car, and the idea of a cosigner can be a hugely beneficial addition to the whole process.
A cosigner will essentially take responsibility for making sure the loan is paid back, and they will be liable for the outstanding amount of the loan if payments are missed or repayment is not able to be made. Obviously this is quite a significant responsibility for the cosigner, and is normally done either by a parent or guardian or some other family member.
The advantage of a cosigner is at it allows someone else to buy or lease a car at a much more reasonable rate, and allows them to build up a credit history in their own right.
Improving Bad Credit
Anyone who considers themselves have a bad credit score would do well to do what they can to improve it. The first port of call is to obtain a copy of your credit report, and see what information is in there. Check that the information is accurate, and that any out of date information is removed.
Certain areas of inflation have a time bar on them as to how long they can be included in your credit report and you should be checked and removed as necessary. The other things that you can do all relate to improving how your credit is viewed by credit bureaus.
The sort of things they look for are prompt payment of bills, some type of regular payment history regarding to all direct debits and use of available credit. Taking time to update payments and clear debt can make a real difference.
In addition, doing things such as building up a positive credit history can help, although it can also take time. Having additional credit cards and personal loans that are secured can show a pattern of behaviour that demonstrates responsibility regarding money.
Having said that it is important not to take on additional debt or loans unless you have sufficient ability to repay them, otherwise she simply end up with a worse credit history than before. It is often possible to obtain credit cards that are either known as secured or pre paid.
A secured credit card me that is is essentially guaranteed against some type of deposit that you hold, often in a bank account. A prepaid credit card means that you have two load it with a certain amount of money before you’re able to use it, I can only use it to the extent of the funds secured on it.
Whilst both of these are a bit cumbersome, they do mean that you are able to use the basis of credit cards as a way of securing an improvement in credit history, and overcome some of the problems associated with bad credit. U
