It can be harder to buy a car when you have bad credit, but do you know why? It all comes down to lender risk, and lenders use your credit reports to determine your risk of defaulting on an auto loan. The biggest part of determining this is your payment history. Let's look at how lenders use this part of your credit, and how you can, too.
Payment History's Role in Your Credit
Nearly everyone has a credit score and credit reports that measure how well they handle credit in their daily lives. Your credit score is made up of five factors of varying weight, the heaviest of which is payment history. Payment history makes up 35 percent of your credit score, and your credit reports show a snapshot of your payment history over the last seven to 10 years.
Each time you use credit, either revolving (credit cards) or installment (car loans, mortgages), it's typically reported to the major credit bureaus – TransUnion, Equifax, and Experian – once a month by lenders. Your account status is typically represented by a numeric or letter value, and each credit bureau has their own particular way of listing the status of your accounts.
Even though there's no standard format when it comes to how a reporting credit bureau lists the status of your accounts, they still share a few things in common. For instance, numeric values range from one to nine, and the best status that can appear is "paid as agreed."
However it's worded, when a lender looks at your payment history, they can see how well you have and are handling the credit you had or have, which helps them decide whether or not to extend you the additional credit you're applying for.
Improving Your Payment History
Remember, accounts stay on your credit reports for seven years (or sometimes 10), and the entire payment history on them, both good and bad, is available for lenders to see.
In many cases, if you have poor credit, chances are your payment history played a role somewhere along the line. Fortunately, your credit isn't set in stone, and you can always improve it.
One of the simplest ways to do this is to begin paying your bills on time. Each timely payment made adds to your payment history, which includes catching up on past due bills and completing payments that close an account. Each time you open a new account or line of credit, you're giving yourself the chance to improve your payment history.
Just because a new line of credit gives you the opportunity to build a positive payment history and improve your credit score doesn't mean you should run out and attempt to open multiple lines of credit, especially when your credit is bad, since it’s also more difficult to open lines of credit when your credit score is suffering.
Even with imperfect credit, though, you may need a big ticket item like a vehicle. Auto loans are more difficult to qualify for with problem credit, but there are lenders that deal specifically with this situation.
Improve Your Credit with a Car Loan
A car loan can be a great way to improve your credit with on-time payments while getting a vehicle. But it can sometimes be difficult to know where to start when you feel like bad credit is holding you back. Making matters worse, special finance dealerships don't often advertise their partnerships with the subprime lenders that buyers with less than perfect credit need.
Here at Auto Credit Express, we understand what it's like to struggle with bad credit car buying. We want to help you take the stress out of the situation by matching you with a dealer in your area that has the types of lenders you're looking for. We've been helping consumers just like you for over 20 years now, and we want to help you, too.
Our process is free, simple, and comes with no obligation. Just fill out our auto loan request form, and we'll begin the process of matching you to a local dealership that knows how to help. Don't hesitate any longer, start your credit improvement and get the vehicle you need from a dealer near you!