Credit scores fluctuate based on new inquiries, new lines of credit and payment history for existing lines of credit. If you're financing your vehicle, your credit score may have decreased because of inquiries. If you're paying cash for your vehicle, the purchase won't affect your credit score.
Credit Score
Each time you authorize a creditor to view your credit report, your score decreases. The MyFICO website states that inquiries make up 10 percent of a credit score and that the impact of an inquiry varies on individual credit history. Someone with little credit or short payment history on open accounts might see more of a decrease in her FICO score than someone with a strong and established credit history. Each inquiry can reduce a borrower's FICO score by up to five points. Once you initiate your car loan account, your score decreases again temporarily because of the new line of credit but improves as time passes and payments are made on time.
Purchase Types
The type of vehicle you buy, such as a new or used purchase, doesn't impact your credit score, with the exception of a dealership that lends directly, such as a buy-here, pay-here lot. These types of dealerships provide their own financing instead of using an outside lender. Most buy-here, pay-here lots don't submit loan accounts and payment information to the credit bureaus. If you are purchasing from one of these lots, find out if the dealer checks your credit or reports the loan to determine if the purchase has any impact on your credit score.
Credit Considerations
If you're concerned about the impact a car purchase has on your credit score because you're in the middle of a a mortgage application or refinance, check with your lender before applying for a car loan. The temporary decrease in your credit score or debt-to-income ratio might disqualify you for certain types of loans. While paying a car loan increases your credit score over time, your debt-to-income ratio decreases. Lenders use this ratio to compare the amount of money you make to your total debt responsibility and determine if you can afford a loan.
Minimizing Inquiries
Before you apply for a loan, choose a lender with low interest rates. Reduce the amount of your inquiries by visiting lender websites or calling in to find out about rate offers before you decide where to apply. If you're purchasing from a dealership, ask your salesperson not to send your application to only one or two lenders. Dealers can submit your application electronically to several lenders at once to find you the best interest rate. Discuss your options before providing a credit application.
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