When you’re looking at your first car loan, you’ve probably heard that your credit score and credit reports affect your ability to get approved by a lender. But what are the differences between the two and why do they matter?
Your Credit Report
You can think of your credit report as a detailed history of your credit activity. Your credit reports contain detailed information about your current and past credit accounts, as well as personal information like your current and previous addresses, employment history, and Social Security number.
The three main credit reporting bureaus – Experian, TransUnion, Equifax – all generate their own, unique credit reports for you based on the information that credit grantors report about the credit accounts you take out, your payment history, your account balances, and more.
Thanks to the Fair Credit Reporting Act, you have the right to access all three of your credit reports for free, once per bureau, every 12 months. Each can have different information listed. Sometimes, you may have to fix your credit reports if there is a mistake, called filling a dispute.
Your credit reports don’t always contain every payment you’ve ever made (or missed). Generally, negative marks on your credit reports remain for seven years. Positive reported history usually sticks around for about 10 years. So, while it isn’t forever, bad and good paying behavior shows up on your reports for many years.
Lenders use the information in your credit reports to determine your creditworthiness. There are a number of formulas that generate your credit score using the information listed on your credit reports, and lenders use them as a quick snapshot of how you’ve handled past accounts. When you’re looking at buying a car for the first time, lenders pull your credit reports and credit score to consider you for approval.
Your Credit Score
Your credit score is a three-digit number generated from your credit history, sometimes called creditworthiness. There are two main credit scoring models that measure your credit score: FICO and VantageScore. The FICO credit scoring model is the one most commonly used by auto lenders, so we’ll focus on that one.
The FICO scoring model uses your credit reports to generate your credit score between 300 and 850. It factors in five different aspects of credit:
- Payment history (35%) – History of how you’ve handled making payments. On-time payments boost your score, while late or missed payments decrease your score.
- Amounts owed (30%) – How much debt you have. Your credit utilization ratio, which looks at how much credit you have available and how much of it you’re using on credit cards, has a lot to do with this factor. Maxed out or high balance revolving credit accounts decrease your credit score.
- Length of credit history (15%) – How long you’ve been using credit, and how long you’ve had accounts open. Typically, the older your credit history, the better.
- Credit mix (10%) – The different kinds of credit you’re using, like installment loans and revolving credit. Variety can increase your credit score.
- New credit (10%) – Starting a new credit account. When you open a new account, a hard inquiry is made on your credit that can drop your credit score slightly, but you can easily build it back up with each timely payment.
Your credit score is determined by more than just how many payments you’ve made, although that’s the largest factor in the formula. Understanding how your credit score is calculated can help you make educated decisions when it comes to car loans and other credit accounts.
How Does My Credit Score Affect Auto Loan Approval?
Most lenders refer to your FICO credit score to see if you’re a responsible borrower to help make approval decisions. Your credit score also helps lenders determine the interest rate you qualify for.
For traditional auto lenders, a poor credit score signals a higher risk, and they usually prefer good credit borrowers. For those with bad credit scores, there are subprime auto lenders (bad credit lenders) that check more than your credit score to determine your eligibility for a car loan.
If you have no credit history, or haven’t used any type of credit, your credit score isn't zero. With no credit, your credit score is likely to land somewhere in the lower-middle range on the FICO scale when you start. No credit just means you’re new to using credit, or you're said to have a thin file.
Having no credit isn’t necessarily a bad thing, it just means that you don't have much on your credit reports to show how responsible you can be with credit. No credit means you don’t have bad credit, either, and working with the right lender on your first auto loan can help add positive information to your credit.
Car Loans With Bad or No Credit
When you have no credit or bad credit, finding a lender to work with can be difficult. Traditional auto lenders typically approve borrowers with good credit, leaving borrowers with imperfect credit with fewer options.
Luckily, there are dealerships with special finance departments. These departments work with subprime lenders that use more than just your credit score to consider you for approval. If you need to find dealers that offer special financing, we want to help.
At Auto Credit Express, we’ve teamed up with dealerships across the country that work with subprime lenders. We can help take the hassle out of finding a dealer in your area. There’s never any obligation to buy, and our process is fast and streamlined. To get started, simply fill out our free auto loan request form.