Credit cards, mortgage payments, credit lines: one thing that is pretty standard across North America is debt. Most people are aware of what their debt is; however they are often not aware of what their credit rating is.
In the United States the Equal Credit Opportunity Act has been created to eliminate any potential discriminatory actions that a future creditor may make. This act ensures that each individual who applies for credit has an equal opportunity to be approved regardless of race, gender, or age.
So what is in a credit score?
One of the major credit bureaus in the United States is FICO. A FICO score is based off of the credit rating model created by the Fair Issac Corporation. The score in FICO ranges from 300-850. The higher the score the better your credit rating. FICO will typically report to one of two bureaus: Transunion and Equifax. The scores on each of these bureaus may be slightly different depending on where your creditors report to.
Your FICO score is comprised of the following sections: Payment History, Amounts Owed, Length of credit history, New Credit and type of credit used.
A low score will always be a red flag for financial institutions and may result in the dealership submitting your contract to a subprime lender. This may mean a higher money factor, a larger down payment or a consignor. Always ask the dealership if there is any other option with the captive finance company before agreeing to lease your vehicle with a sub prime lender.
A few minor ways that you can rack up that negative credit score:
1) Miss a few payments: each time a payment is past 30 days it is reported to the credit bureau
2) Accounts that are open on file, but no longer active. The more accounts that you have on the bureau the potential increases for a lower score and a higher debt ratio.
3) Several inquiries by financial institutions: when shopping around do not fill out a credit application until you are certain that you would like to lease that vehicle from that store. Those pre-approvals count as hits on your bureau and will result in a slightly diminished scores
4) Outstanding collections: In addition to large debts such as small claims court, unpaid child support and student loans, small companies such as fitness clubs and cell phones will often report outstanding bills to the bureau.
What are some ways that I can increase my credit score?
1) Make your payments on time
2) Pay off any outstanding bills and/or debts
3) Keep the credit card balance low: try to avoid maxing out your cards
4) Do not use debt to pay debt
5) Maintain only the credit cards that you need: close any accounts that have been inactive and avoid opening up several new accounts
I was declined: but I don’t have any negative credit, I just don’t use credit:
When trying to approve an individual for a credit, a company typically wants to see a history of the consumer paying a similar payment. This gives the creditor confidence that you can make their payment as well. Debt is not always a negative thing. Actually some debt is a good thing as it shows the financial institution that you have a positive track record of paying your bills in a timely manner.
This being said, be sure that you have some debt in your own name. This is a common dilemma for married individuals where their spouse is the primary for the majority of debts. Remember not all bureaus report consignor activity, so even if you have some credit cards in your purse: they have to report onto your bureau to affect your score.
I have a high score; why was my credit declined?
Credit score is only a portion of what your creditors will look at when seeking an approval. Yes, you read it right: most creditors are looking to approve you. However in order to do this, there has to be some certainty that you will be able to pay your debt.
The other item that creditors look it is something called your debt ratio. Most creditors believe that in order for you to afford the payment, your debt ratio score should be below 40%. Now where does this number come from?
Debt ratio is calculated by looking at the following items:
The major debts that are outstanding and/or the debts on your bureau
This includes:
1) The lease payment
2) Your mortgage/rental payment
3) Any additional loans
4) Credit card payments
5) Any other monthly instalment that you may have disclosed in your credit application or that can be seen on your bureau
The second portion that they look at is Income:
Income can include:
1) Gross Income received from your job
2) Part Time Income
3) Rental Income
4) Any other form of income that is consistent and is documented (items such as tips cannot be used as income as this is not consistent).
In order to be approved your total debts cannot be anymore than a certain percentage (typically 40%) of your income. If your debts exceed this percentage, you may be requested to ask for a consignor or seek a vehicle with a lower payment.
Credit score and Debt ratio are the two main items that the financial institutions will look at when seeking an approval. As a consumer, you have the right to access this information. If you are uncertain what your credit score may be or think there may be an error, contact FICO to request a copy of your Transunion and/or EquiFax credit score.
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