Car prices keep rising due to several factors. On average, consumers pay close to $50,000 for a new vehicle. The cost is more for luxury cars. Although financing is an option used to purchase a vehicle, not everyone has the proper credit. To help you get to that point, here are five ways to improve your credit score.
1. Review Your Credit Scores
There are three credit reporting agencies — Equifax, Experian, and TransUnion. Each one contains a listing of unpaid debts. Some items, like credit card balances, are okay if regularly paid on time. Others, like charge-offs, affect your credit score because they represent unpaid debt. A large number of these items reduce your credit rating.
Review these reports to gain a better understanding of where you stand. You can request a copy of each once a year. Address any found discrepancies as soon as possible with the credit bureaus.
2. Pay off Outstanding Debts
Addressing outstanding debts seems like an obvious way to improve your credit to finance a car. However, it’s not so simple when you struggle to pay your regular bills. A possible solution to get started is to create a debt snowball.
List what you owe in order of amount. Pay as much as possible to the lowest debt amount while making minimum payments to the other bills. When you pay off the initial amount, take that money and apply it to the second bill. Continue until you reach the most expensive debt.
The debt snowball reduces overwhelming feelings and concerns about how you’ll pay your bills. Instead, you see progress through small and measurable goals. For that reason, you gain confidence in your finances and yourself.
3. Consolidate Your Debts
Another way to lower the amount you owe is to consolidate your debts. Look into loans and programs that review what you owe. The advantage of this option is it offers reduced rates over your high-interest credit cards. Thus, the installments are lower than separate payments.
Bankruptcy isn’t a form of debt consolidation. Avoid using this method to clean up your credit report. Bankruptcies remain on the record for seven years. If you break the agreement, you are subject to further credit penalties.
4. Pay Cash Instead of Credit
Some financial experts believe credit cards represent good credit. However, that’s if you pay the balance each month. It’s not the case when you max out your cards and can’t close your debts.
The solution is to pay in cash for your purchases. For example, you can reduce a car loan amount through an internet search on the question “What is my car worth?” Companies like Carputty review your vehicle’s make, model, and condition and provides an estimated value.
Take this with you to the dealership to get the best deal for your trade-in. You should receive a sizable reduction on the car’s cost through negotiation. In turn, your loan and payments are less than you believed.
5. Avoid Hard Credit Checks
There are two types of credit checks. A soft inquiry permits credit companies to review your existing balances. Usually, a soft credit check doesn’t affect your rating.
On the other hand, a hard inquiry can do damage to your score. These occur when applying for a mortgage or credit card. Although one hard check doesn’t do much damage, multiple inquiries in a short time adversely affect your credit score. The damage takes months or years to come off your report.
Other Methods to Improve Your Credit
There are other methods to improve your credit. For instance, review your debt-to-income (DTI) ratio before you begin shopping for a car. Your income should be twice the amount you owe, not the other way around. If it is, hold off on purchasing a vehicle until you resolve your financial issues.
Another method to consider is working with collectors to resolve your debt. Organizations are willing to agree to a one-time payment to close your account. If you go this route, get the agreement in writing.
In the end, there are many ways to improve your credit to finance a car. Research the ones you think work best for your situation. Whatever you choose, don’t make an impulsive decision to purchase a vehicle. The more you do ahead of time, the greater return on investment for your new automobile.