We’ve all got it. We all need it. But do we all understand exactly what a credit score is, or what it can do for us? What is good credit? What is bad credit? Can credit be repaired? Through a series of informative blog posts on the world of financing we aim to clarify these questions and more.
First up, what are credit reports and scores and what do they have to do with financing my next vehicle?
When you submit a credit application to finance your next vehicle at Tip Top Auto it is done through a secure portal that delivers the information to lenders we work with. Lenders may be banks or other financial institutions. These lenders take a look at your credit report and score and determine, based on your history, whether you’ll be a reliable customer or not. Meaning, how likely are you to pay back the money they are lending to you. The better the credit score and report, the better the offer from the lender, or the lower the interest rate.
So, now that we know that the likelihood of securing good financing is based on our credit report and score, let’s break down what these two terms mean.
Since we think GGR Finance does an excellent job of this, we’ll let them take the lead here to tell you about credit reports:
A credit report is a summary of your credit history. This is basically a list of all of the ways that you’ve used or applied for credit and information about your behavior with that credit.
Your credit report begins the first time you borrow money or apply for credit. This could be applying for a credit card or even using a “buy now, pay later” promotion at a store. Each time you do this, the lender sends information about these accounts to the credit reporting agencies so that they can compose your credit report.
Personal information that appears in public records, like filing for bankruptcy, will also appear on your credit report so that your lender can have an entire picture of your credit history.
A credit report doesn’t just list your credit cards; it includes all kinds of information about your behavior with that credit, like whether you make your payments on time, if you ever miss payments, and whether you go over your credit limit. Sometimes it will include your phone or internet accounts, utilities like hydro and gas, and any bank accounts that have been closed “for cause”, which is usually due to money owing or fraud.
As we know in addition to looking at your credit report lenders will also look at your credit score:
A credit score is a three-digit number based on the information in your credit report. Credit bureaus don’t release the exact math behind this number, but what we do know is that your credit score increases when you can demonstrate that you use credit responsibly (paying bills on time) and that your credit score decreases when you show that you have difficulty managing credit (a bill is paid late or goes to collections).
Your credit score, also known as a FICO score, is used to tell a lender the likelihood that you’ll be able to pay back the money they’re lending.
It’s up to each lender to decide the lowest credit score they feel comfortable with and will likely use this score to set an interest rate and a credit limit. The higher the score, the lower the interest rate, because, generally speaking, the risk for the lender is lower.
In Canada, credit scores range from 300 to 900, with the best being 900. Credit scores change every time your credit report is updated.
The Financial Consumer Agency of Canada states any of these factors can affect your credit score:
- how long you have had credit
- your history of making payments (Do you carry a balance on your credit cards? Have you missed payments?)
- your outstanding debts (Are you close to your credit limit?)
- the number of recent inquiries about your credit history (Are you trying to get more credit?)
- the types of credit you are using
- any record of bankruptcy or your debts being sent to a collection agency.
The average credit score is 720, with a credit rating under 600 to be considered risky. Basically, the better your credit rating, the lower the interest rate you’ll be offered from the lenders. Having said that, a credit score is not a static number, but one that can altered or rebuilt.
Consolidating debt, like using your line of credit to pay off credit cards is one way to improve your credit score if you have debt in multiple areas. Another way to improve your score is by building up your responsible use of credit. In fact, 78% of borrowers see their FICO score increase 3 months after getting a loan. On average, this increase is 23 points!
Now that we've got a better understanding on credit scores and reports and how they affect your ability to secure financing for your next vehicle, it's important to learn how we can improve a credit rating. Stay tuned for our tips on how to rebuild hurt credit.