Why the Poor pay More for Cars
Ok, so now you know the unfortunate truth. But do you know just how much more you’ll pay for car if you have bad credit? Here is a breakdown of the numbers based on an American study. We can use this study to better understand what the situation is like here in Canada because our credit systems are so similar.
Probably the most telling and even alarming information we got from the study is that people whose credit scores fall into the top percentage can expect to pay 3% interest on their car loan. On the other hand, people with significantly lower credit score can except to pay an interest rate of 20% on the same kind of loan.
Real Life Application
Percentages and numbers are all good and well but let’s apply them to a real life situation so we can better understand how they might actually affect your life. Let’s say two people are buying the same car and they both need a $20,000 loan. One person has a lower credit score and falls into the “fair” category while the other has a higher credit score and falls into the “good” category. The person with the “fair” credit score will end up in the long run paying roughly $2,000 more for their car than the person with a slightly higher score.
This is why credit scores are so important, even a slight difference can mean a pretty significant saving. Improving your credit score by even five points could push you into a higher category and therefore allow you to qualify for a lower interest rate. We understand that all this information can seem overwhelming but it’s important that you know it so you can take control of your credit score and work to improve it so you can get a car loan and interest rate that works for you.
What is your Credit Score and Where to find it
Your credit score is a 3 digit number that evaluates your current financial health, that’s why it affects so many different parts of your financial life. If your current financial health is poor then lenders and banks see you as a risk and therefore they try to protect themselves from you with high interest rates.
Your credit score is your responsibility so if you haven’t been taking care of it then now is the perfect time to start. First you should probably know what it is. In Canada you can purchase your credit score from one of the credit bureaus, either Equifax or TransUnion. Once you know what your current credit score is you’ll be able to create a plan to improve it. Here are the five factors that the credit bureaus use to calculate your credit score, knowing what the five factors are should better prepare you to work on your overall credit health.
- Payment history: You need to make your payments on time and in full every single month.
- Debt utilization ratio: How much debt you have compared to how much available credit you have.
- Length of credit use: How long have your credit accounts been open? The longer the better.
- New credit applications: Have you recently applied for new credit but keep being rejected?
- Types of credit: Do you only have credit cards? Having more than one type of credit will help improve your credit score.
Check out this video for an explanation of how your credit score is calculated.
How to Improve your Credit Score
Now that you know what your credit score is, it’s time to figure out how to improve it. Even if you have a high credit score (they’re measured on a scale from 300-900) there’s always room for improvement. Even if all this information is new to you, you probably already have a pretty good idea about what areas of your financial life need improvement. Here are some tips to help you improve your score and your financial health:
- Always pay off your credit cards in full at the end of your billing period, don’t fall into the minimum payment trap.
- Keep an eye on your credit score. Knowing what it is will help you work to improve it and keep yourself on the right financial track.
- Do not ever close a credit account even if you’re not using it. Credit accounts that have been open for longer periods of time are great for your credit score.
- Have more than one type of credit account open if possible. Just don’t abuse them as this will defend the purpose.
Your credit score is the heart beat of your financial life and it should be treated that way. Having a low credit score can and will affect all aspects of your life especially when you need a loan. Being lent money is serious business and your credit score could be the difference between spending $2,000 and having $2,000 in your bank account.