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Rebuild Your Credit to Get that Auto Loan!

Posted on December 9th, 2013

phoenix 6According to MSN Money, Arizona is the second-worst state for credit in the country. It is a place wherein low credit scores are indeed a major concern. If you live in Phoenix and are one of the state’s residents who has blemished credit, you should take action immediately. Rebuilding your credit is crucial, especially if you will be applying for an auto loan. An improved credit standing will make you more qualified for auto financing.

Found below are five things you can do to repair your credit and increase your credit score:


Make timely bill payments

A key factor that determines your credit score is your payment history, so make sure it is clean. Pay your bills on time every month. If you tend to be forgetful, pay the bills as soon as you get them or have reminders in place so you won’t miss any payments. You may also consider electronic bill payment.

If money—and not forgetfulness—is the problem, contact your creditor and see if you can adjust your billing cycle or at least come up with a more suitable arrangement that will allow you to pay your bills on or before they are due.


Pay down your debts

Just like payment history, amounts owed also determine your credit score. Your outstanding debts account for 30 percent of your score. The more debts you have, the lower your credit score. This is why you should pay off or at least reduce your debt balances.

Dave Ramsey suggests paying off the debt with the smallest balance first, while others advice that one should start with debts with the highest APRs (annual percentage rate). It really doesn’t matter what you start with—what counts is that you repay all your debt balances and do it on time.


Limit new credit card applications

Another thing that determines your credit score are new credit applications. In the case of new credit applications, the more isn’t exactly the merrier. Why? Every time you apply for a new credit card, the creditor pulls your report. If there are many creditors that pull your report, your score will be affected. Also, having too many inquiries make you seem a big risk for potential lenders. An auto loan lender will wonder why you are seeking too much credit and whether it is a sign you couldn’t properly handle your finances.


Keep old credit cards

Length of credit history is also a determinant of your credit score. If you close an old credit card, the credit bureau will remove the old card’s history from your report. This then reduces your credit age and in turn, lowers your credit score. Auto loan lenders consider borrowers with short histories as bigger credit risks, and this could be reason for them to deny financing.

Note that the effect of closing an old credit card is not immediate. Your score will not decline immediately, but once it declines, the drop is considerable. So keep your old accounts open and use them every once in a while so they don’t become dormant.


Check your credit report and contest errors

Errors in credit reports are more common than you think. It is possible that your score is lower than it should be just because of some errors. Get a copy of your report from each of the three credit reporting agencies and check for discrepancies. If there are discrepancies, waste no time reporting them.

How to do it? Send via certified mail a dispute letter along with a copy of your credit report. Make sure to highlight the errors in the copy you send. In the letter, explain why the highlighted parts of the report are erroneous.

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