What You Can Do Now to Help Your Credit

If you have bad credit and are wondering if you can still get a car loan, let us show you how we can help.

The first thing that you should know is that your credit score does not mean very much to the banks. Some people with low credit score (around 500) are still able to get the lowest interest rate, and people with a great credit score (around 780) can still be declined.

Lenders are much more concerned with your debt load and your debt service ratio. Here are the things that get taken into consideration:

Credit Utilization

Credit utilization is the ratio of your outstanding credit card balances to your overall credit card limits. This measures the amount of your credit limit that’s being used. For example, if your balance is $300 and your credit limit is $1,000, then your credit utilization for that credit card is only 30%.

But being close to 100% utilized could be an indication of financial struggles, and this may mean that you are not currently able to take on more debt. Being 100% utilized on a small credit limit (for example, a $1,000 credit card) it’s not necessarily too bad. Some people work with small credit card limits in order to avoid a heavy debt load, and a small credit limit means a small debt.

The worst thing is to be over 100% utilization. Most credit cards allow you to go a few hundred dollars over the limit, which can easily put you up to 130% utilization.

What you can do

If you are over 100% utilization most lenders will decline your application. Make sure to pay down your credit cards to under their limits before applying for a loan. (But remember, it can take up to 30 days for this to be reported to the credit bureaus.)

Total Debt Service Ratio

Your total debt service ratio (TDSR) is the percentage of your total amount of financial obligations compared to your total gross income. For example, if your total gross income is $10,000 and your total financial obligations (rent/mortgage, credit card payments, cell phone bill, utilities, personal loads, student loans etc.) add up to $5,000 — your TDSR is 50%.

Lenders generally like to see a TDSR no higher than 40%.

To calculate your TDSR, get a free credit report (using Credit Karma or another service) and calculate the minimum payments of everything listed on the report. For example: if you have an outstanding balance of $10,000 on your credit card but the minimum payment is $150, use the $150 payment in your TDSR calculation.

Write our all of your obligations (including rent/mortgage). Use $400 as a good estimate for groceries and other expenses.

Divide this number by your total gross income (before taxes and other deductions) and the result is your TDSR.

What you can do

If this number is above 0.4 (which is 40%), you may have issues getting a car loan and will need to find ways to lower your financial obligations (pay off cards, get a roommate to share the rent, consolidate your outstanding credit, etc.).

Past due on loans/credit

Being behind on payments for credit cards or loans (especially a car loan) is a sign to lenders that you are currently struggling to meet your current obligations and won’t be able to handle any more payments.

What you can do

Before you apply for a loan, make sure you are all caught up on your payments (especially credit cards and car loans).

Everyone slips from time to time, and the occasional missed payment or collection in your past will not necessarily mean that you will not qualify for a loan. If all of these three things are in good order your chances of getting a car loan are quite good.