Thrifty Thinking: Car Shopping and Credit Reports

As the Detroit automakers released double digit sales increases for May, it is evident that there is a resurgence in the demand for automobiles. But before you kick the tires or experience that “new car smell,” those looking for a new set of wheels should do some homework first. GreenPath Debt Solutions, a non-profit financial education and counseling organization with headquarters in Farmington Hills, Michigan, has put together some money-saving tips when it comes to preparing to purchase a new or used car.

According to Dorothy Barrick, GreenPath credit counselor, it is important to know that there are two very different pre-qualifications for obtaining a favorable interest rate on an auto loan. “One is to have a good credit score,” said Barrick.  “The second is to have a favorable ‘debt to credit ratio.’  Both of these components are equally important.”

How long before making an auto purchase should buyers start getting their credit in order? If you are looking forward to the 2013 models coming out in the fall, the time is now to get your credit in order. Everyone should look at their credit report at least once a year. You can get a free copy of your credit report at www.annualcreditreport.com, but you do have to pay to see your credit score. Barrick recommends paying for the score and suggests pulling the report at least four months before you start auto shopping.  “This will allow you ample time to correct any incorrect information that you might find,” she said.

How high should auto buyers aim to get their credit score before buying a car? Currently there are three major credit bureaus, Equifax, TransUnion and Experian, and each has a slightly different scoring system.  As a rule of thumb, a grade A score is between 680 to 719 and an A+ score is 720 or above.  “Credit scores are like your high school report cards,” said Barrick.  “There was nothing wrong with a B or a B+, even though an A+ score may bring you a better interest rate. The bottom line is to make sure you work towards getting the best score possible under your current circumstances.”

Why shouldn’t consumers open or close credit cards before purchasing a car? Barrick explains that if you close a card without a balance, you are raising your debt to credit limit ratio, which lowers your credit score. If you close your oldest card, your length of credit history becomes shorter and this lowers your score. If you open up new cards, it signals to the lender that you may need credit cards to pay your existing bills and this, in turn, lowers your score.

Barrick says that a little planning, before stepping into the showroom, can add up to big savings over the life of the auto loan. For more information on credit scores and other issues related to your credit, log on to www.greenpath.org and click on the GreenPath University link.

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