Once the balance on your credit card goes over your credit limit, it can be harder to catch up. The over-limit fee gets added to your balance each month. It also could trigger a penalty rate, since card issuers have the right to revise your interest rate once you default on your credit agreement by exceeding your limit. All of this damages your credit report, affecting your ability to get a favorable loan with auto lenders.
FICO Scoring Model
Your FICO score, which ranges from 300 to 850, gives lenders a snapshot of your credit they use when deciding whether to extend you that car loan. The score is comprised by five main categories, with your payment history contributing 35 percent and credit utilization 30 percent. Another 15 percent comes from your average length of time you've had credit, while acquisition of new credit and the types of credit you have contribute 10 percent each.
Optimal Scores for Auto Financing
You should aim to have a credit score of 620 or higher to qualify for good auto loan rates. If you have an excellent score, between 740 and 850, you'll qualify for low interest loans, averaging 3.2 percent at the time of publication. A score between 739 and 680 is considered average and will get you financed at about 4.5 percent interest. The auto financing industry considers credit scores below 620 to be subprime -- individuals who have tarnished or limited credit history. Subprime credit scores will make it harder for you to get approved for auto financing. If you qualify, interest rates are high, averaging between 6.5 and 12.9 percent.
Running Up Card Debt
Carrying big balances on your credit card will hurt your chances at getting financing. Maxing out your card directly impacts your credit utilization, lowering your overall credit rating. The debt-to-credit ratio is calculated using your end-of-month balance appearing on your bill. Since the FICO score plays a great part in the credit decision, a maxed out credit card is a red flag for lenders because it indicates you may have financial problems you failed to disclose in the application. Bottom line, it denotes poor debt-management skills.
Preparation is Key
Take measures to appear less risky to lenders before applying for auto financing. Pay down your credit card debt so that the balances on it are less than 30 for what lenders see. Correct any errors and ensure the report is accurate. If your score is low, embark on programs that will push it back up over a period of time. Lower your debt, make on-time payments and avoid applications for new credit that cause someone to pull your credit report with a hard inquiry.
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