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Credit Reports and Scores: Where to Begin?

600px-Credit-score-chart.svgA good credit is important to get a good auto loan rate. But how can you establish one if you don’t really understand how credit works? You may be one of many consumers who get confused every time they read their credit reports or see their credit scores. Here are important things you need to know to understand credit better.

The Credit Report

Your first encounter with your credit happens when you get a hold of your credit report. That document tells you about your payment behavior, credit obligations and outstanding balances. It also contains some personal identifying information, details of inquiries for your credit, and public records. Your income, checking and savings accounts, educational background, medical and criminal records, religion, and marital status are not included in your credit report.

The credit report, along with the credit score, is a fundamental requirement in applying for a car loan. Lenders look at it to determine your likeliness to follow through on your payments if they grant you an auto loan. With this in mind, it is wise to review your credit report months before you actually hand lenders your auto loan application. In that way, you’ll have enough time to improve your credit and correct errors, if there’s any.

Your Credit Score

Credit scores and credit reports are not the same and should not be used interchangeably in written and spoken discourses. Credit reports are documents while credit scores are numbers which serve as your rating or grade of creditworthiness. Lenders use your credit score, in conjunction with your credit report, to assess your likeliness to pay off an auto loan. The lower the score, the less likely you’ll get approved.

According to FICO, a credit-scoring firm, a credit score is computed this way:
•    Payment History – 35%
•    Debt – 30%
•    Length of Credit History – 15%
•    New Credit – 10%
•    Types of Credit – 10%

However, FICO is not the only company that provides credit scores. There’s also the VantageScore which has a different score range. Differences such as this make the world of credit even more confusing.  But the idea here is the higher the credit score, the better the interest rates you can get. If your credit score is low, you might want to build it up first before applying for a loan so you will avoid high interest rates. In any case, keep in mind that lenders look for good credit risks or borrowers who can indeed pay back on time and with the right amount.

Take care of your credit by making payments on time. Delinquencies mar your credit and damage your creditworthiness. Paying on time is something you can do to keep your credit looking good.

Photo credit: User:Pne / Wikimedia Commons / CC BY 2.0

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