Why Getting Your Credit report is the First Important Step in the Car Buying Process

What is a Credit Report?

A credit report is a tool used by financial lenders to calculate the risk involved in loaning you money. Think of it as a character rating: An historical snapshot of your financial credibility, which is carefully analyzed and used to calculate a number called a credit score. Here's how the experts at Credit Repair describe it: "Just like when you were in grade school, your credit report is your financial report card to the world." The higher your credibility, the higher your credit score; the higher your credit score, the better chances you have of being approved for a loan and obtaining a lower interest rate.

What's on My Credit Report and Why?

Your credit report will show your past re-payment performance on a wide range of transactions, including merchant credit cards, student loans and checking accounts, as well as any tax leans, judgments, defaults or bankruptcies. Your credit score is separate from your credit report, but it is directly impacted by negative items on your credit report. If you know what's on your credit report you have an opportunity to clear up negative items before you apply for an auto loan, increasing your chances for approval and the lowest interest rate possible.

Adding Up the Numbers: Your Credit Score

There are three major credit rating bureaus lenders rely on to obtain your credit report: Trans Union, Experian and Equifax. All three collect information on your financial history and debt obligations. Your credit score, or FICO score, is calculated by the Fair Isaac Corporation. According to CreditReporting.com, a statistical program is used to determine your FICO score, which gives points for a number of things that boost the potential of repayment on any loan. The more points you have, the higher your FICO score.

Flex Your Muscles: Use Your Good Credit for Leverage

Your credit score plays a key role in determining your qualifying interest rate on any loan, also known as your buy rate. Auto dealers can legally charge uneducated car buyers higher interest rates than their buy rates may actually be. You can flex your bargaining power and ensure your dealer offers you the best buy rate possible by getting pre-approved for an auto loan before you go shopping. Even a two percent difference between your pre-approved buy rate and a dealer's buy rate can yield substantial differences in what you'll pay in interest over the long haul.

See It on Paper: Get a Copy of Your Credit Report

Experts recommend that you get more than one copy of your credit report because no two credit reports are alike. The leading credit bureaus will charge a fee of about $9, however, in some states you can order your credit report free online (MyFICO.com) or through a bank or private lender. Regardless of what state you're in you can obtain a free copy of your credit report if you’ve been denied credit, insurance, are on state aid, unemployed or find your credit report contains fraudulent errors.