It’s hard to overstate the importance of a good credit score. After all, they are the main factor that lenders use when determining whether or not you are a good candidate for a loan. But your credit score is important for reasons beyond borrowing. A good credit score can help you score a better apartment, get you better rates on car insurance, and more. But how much do you really know about your credit score, and what questions should you be asking?
Here’s everything you need to know about your credit score.
What is credit? And what is a credit score?
Credit refers to any agreement where a borrower receives money from another person or institution with the understanding that they will repay the money, usually with interest. When people talk about credit, they are referencing their credit history, which is a record of their credit usage.
A credit score is a number that indicates to lenders their capacity to repay a loan. A credit score is between 300–850 and indicates a consumer's creditworthiness. The higher the score, the more likely a person is deemed to pay back their loan.
How are credit scores calculated?
Credit scores take into account five different factors in your credit history. Each factor is weighted differently. The factors are:
- Payment history (35%). Do you pay your accounts in full and on time?
- Amounts owed (30%). How much money do you owe?
- Length of credit history (15%). How long have you had accounts?
- Credit mix (10%). Do you have a healthy mix of accounts?
- New credit (10%). Are there new accounts that you haven’t proven your ability to pay?
Every month different agencies will voluntarily send information to credit bureaus. These agencies typically include banks, credit unions, retail credit card companies, mortgage companies, car loan lenders, and debt collectors. These companies will share:
- Any new applications for an account
- The date a new account is opened and the loan amount/ credit limit
- The account balance
- The status of payments made
- Whether or not the account is sent to collections
Additionally, credit bureaus also purchase public records from public records providers. These include liens, court judgements, and bankruptcy filings.
How do I know if I have good credit?
The best way to know if you have good credit is to simply check your credit score. There are many sites that will allow you to check your credit score for free, so it’s a good idea to monitor it regularly. Additionally, you should check your credit report at least once a year (but we recommend reviewing it three times).
Credit bureaus will allow you to access your credit report once per year for free and without it affecting your credit score. If you do this once every four months at each of the three bureaus, you will be able to effectively monitor your credit.
Your credit score will follow into one of five categories, which will indicate the health of your credit score.
- Exceptional (Super prime): 781 to 850
- Very Good (Prime): 661 to 780
- Good (Non prime): 601 to 660
- Fair (Subprime): 501 to 600
- Poor (Deep subprime): 300 to 500
What should I look for in my credit report?
When you are able to review your credit report there are several things you should look for. Your report is broken down into four sections that you should review.
- Your personal information section. You should review to make sure that your name, address, social security number, employment history, and marital status are all up to date.
- Your public records section. You should review this to make sure that there are accurate records of any lawsuits, bankruptcies, liens (including tax liens), and judgements.
- Your credit accounts section. This will be the longest part of your report, but it's where the meat of your credit score lies. Review it to make sure your payment history is correct, that account ownership is correctly listed, that debts that are paid off are listed as so, that closed accounts are accurately noted, and that there is no negative payment information that is older than seven years.
- Your inquiries section. Review this to ensure that you authorized any hard inquiries on your account. It is illegal for someone to request a hard inquiry without your consent.
If you notice any errors to the credit agency as soon as possible. They will look into the matter within 30 days. If they do not comply they will be in contempt of the Fair Credit Reporting Act.
What are the benefits of good credit?
There are many benefits of having good credit, and in general it will make your financial life much easier. These benefits include:
- You will be offered lower interest rates on credit cards and loans
- Lenders will be more likely to approve you
- You will get utility services more easily
- Landlords will approve you for rentals more easily
- You will be approved for higher credit limits
- You will look better to potential employers
- You will get better insurance rates
- You will have better negotiating power for loans and accounts
What credit score do I need to refinance my car?
There is no magic number credit score when it comes to refinancing your car. But car loan refinance is much more beneficial when your credit score is in good shape.
The car loan APR you are offered will be based on a few factors:
- Your credit score
- Your income and debt-to-income ratio
- Your vehicle
- Your current loan information
- Current market rates
Your credit score is the factor that you will have the most control over. The better your credit score is the lower the car loan APR you will be offered. The best rates are reserved for those with the best credit, so taking the time to improve your credit score is well worth it.
Does refinancing affect credit score?
People commonly wonder if refinancing hurts credit score. And while it will affect your credit score slightly, the benefits of refinancing a car will far outweigh any slight dips that it may cause in your score.
Refinancing a car loan affects two parts of your credit score, your history length and your new credit. Opening a new account, it will shorten your credit history length. It will also count as a new credit and the hard inquiries will be noted in your credit report. But both of these will only cause slight dips in your score, and hard inquiries only affect your credit score for about a year.
But the benefits of refinancing a car loan can really help your credit score. If you are having trouble making your monthly payments, refinancing to a longer repayment period can lower your monthly payments and make your monthly budget more manageable. This means that you will be able to more consistently make payments (on all of your accounts, not just your car loan). And that can really bump your payment history section, which is the most influential section of your credit report.
Refinancing to a lower car loan APR can also loosen up more money in your wallet so that you can pay down other debts, which will also improve your credit score.
How can I raise my credit score?
If you are interested in refinancing a car loan it is a good idea to work on your credit score before applying. This will give you the best chance to be offered good terms and a good car loan APR. There are a few steps you can take to ensure your credit score is in its best shape before you apply.
- Make on time payments to all of your accounts (consider autopay if applicable).
- Check your credit report for errors.
- Pay down debts with high credit utilization ratios first.
- Continue using your credit responsibly.
- Don’t close any credit accounts.
- Request higher limits on your accounts.
- Catch up on any past due bills.
- Have someone cosign a loan with you (you can benefit from their good score).
There is no quick way to improve your credit score. It will take time and commitment, but it will be worth it for you in the long run.
That’s everything you need to know about credit scores: what they are, why they are important, and how you can improve yours.
Building a great credit score takes time, but it’s incredibly important to your long term financial success. Better interest rates, easier approvals, and more peace of mind are waiting for you on the other side.
Refinancing a car loan is a great step to helping your credit score. While you want your score to be in great shape before applying for refinance, keep in mind that it can help you improve your score too by loosening up some money every month.
If you are thinking about refinancing your car loan, contact Auto Approve today! Our experts can help guide you through the refinancing process and help you start saving money immediately.
So don’t wait, contact Auto Approve today to get started!