Mike Clover

Your new car and Your Credit Score

Start saving money today by being educated about your credit.

One very good reason to get a copy of your credit report and begin working to get your credit score as high as possible is the difference in interest rates you'll pay if you need to buy a new car.

Research shows that a borrower with a score under 600 will pay over 18% for a car loan - while a borrower with a score over 720 will pay only 6 5/8%. As you might expect, the difference in the payments is staggering.

Rates for borrowers with scores between those ends pay less interest as their credit scores climb, but the rate doesn't drop below 10% until you reach a FICO score of 660.

To add insult to injury, insurance companies also charge more if your credit score is low. While there doesn't seem to be a correlation between credit scores and driving habits, there is a correlation with regard to paying the premiums regularly and on time. Insurance companies like to have their money, so they charge more at the outset, knowing they might not get the full premium.

Rather than use the FICO score in its pure form, insurance companies use a variation called an "insurance score." This is recently coming under fire and several states are now regulating what information insurance companies can use.

Many states now prohibit insurance companies from using the following information in determining your score, and your rate:

- No credit history

- The number of credit inquiries

- Credit used for medical bills

- The addition of new loans

- The type of credit, debit or charge card used

- The amount of credit held

In other words, it looks like all they'll really be able to use before long is your actual payment history. To find out the regulations where you live, go to your State's Department of Insurance website.

Remember that in addition to your credit score, lenders consider the amount of your own money you are investing in a purchase. You're obviously less of a risk if you've made a down payment of 20% than if you've gone in with zero down.

Who knows why it took lenders so long to figure out what the rest of us could plainly see - if you have nothing invested in a purchase you have nothing personal to lose, so you're much more apt to simply walk away if the going gets tough.

So, if you can put together a substantial down payment before making a purchase, you should get much better treatment from the lender. Now might be a good time to take on that part-time job or become a week-end entrepreneur!

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