What should I do with my bad credit accounts before taking out a car loan?
Hello, I have a question. I have a mortgage for 142,000 and 4 credit cards. One paid off, one with a high balance (less than $2700) and 2 smaller amounts. I also have a few collections, mostly medical but one cell phone that is technically almost 7 yrs old but they just reported as opened in 2011. My highest score is 641 and would like to get an auto loan. Which debt should I pay first? I'm on time with all monthly bills.
Thank you for your question about a car loan with bad credit.
If you have bad credit, then bad credit lenders will shower you with offers for car loans and bad credit. My recommendation, don’t be tempted. Bad credit and car loans do not mix. You will pay higher interest, and you may not be able to handle the payments. Even though your car is collateral for the loan, it probably won’t pay off the loan, and then you will have to deal with a deficiency balance with no car.
Car loans with bad credit are similar to any loan with bad credit. Your best action is to plan ahead, improve your credit and then shop for the best auto loan available.
To help you let us look at the different credit aspects in your question including:
- Components of credit score
- Your credit history
- Steps to improve your bad credit
- Summary and Recommendations: Shopping for a car loan with good credit.
Components of Credit Score
A FICO score of 641 is not poor, but it still needs improvement. The main component of your credit score is timely payments. It takes time to build your credit record. You mention that you are making all you payments on time, which is a crucial factor. However, it takes time to build your credit record. The FICO score is composed of five elements as follows:
- Payment History
- Credit Utilization
- Length of positive history
- Credit Mix
- New Credit
For a full explanation of the FICO score and its components read the Bills.com article FICO Score Basics.
Your Credit History
Although you did not provide a full account of your personal finances, you did mention a number of points. First, let us look at your situation as it relates to each of the elements of your credit score.
Payment History: You mention making timely payments. That is a prerequisite for a good credit score. If your collection accounts are old, then there effect on your credit score diminishes. However, lenders with good interest rates will deny, in general, a loan with collection accounts on a credit report.
Credit Utilization: It is important not to over utilize credit balances, generally not to go over a 30% utilization. Having one credit card paid off is good. The higher balance is a problem, as is small accounts if they carry a high utilization rate.
Length of Credit History: As you do not mention the amount of time you have had your credit cards and mortgages, it is impossible to gauge the effect on the credit score. However, it is important not to close accounts while you are trying to improve your score.
Credit Mix: You have a decent credit mix of credit cards and a mortgage.
New Credit: Once again, there is not enough information, but it does not seem that you have been taking a lot of new credit.
Steps to Improve Your Bad Credit
As mentioned, the first step is to plan ahead and improve your credit. Here are some tips to help you improve your position:
Take out your credit report: Make sure that you monitor your credit report regularly. You can receive, through AnnualCreditReport.com a free credit report from each of the three major credit reporting agencies (Equifax, TransUnion, and Experian) once a year. Stagger your requests. (The reports do not include a credit score).
#1: If you want to monitor your credit report, with your credit score, then receive for a free trial period, your credit report with your credit score.
Pay off collection accounts: Old collection items will raise your score and make it possible to deal with good lenders. The best tactic to deal with delinquent debt is to negotiate a pay for delete. (For general and practical information read the Bills.com article pay for delete). This will erase the derogatory collection item from your credit report.
Dispute any incorrect items on your credit report: You mention that an old cell phone has almost reached the time when it should be erased from your credit report. Most derogatory items (not bankruptcy or tax liens) remain on your credit report for 7 years after the first 180 days of delinquency. It is most likely that the statute of limitations has expired, although your creditor can still sue you, you will have an affirmative defense to have the court dismissed. However, many creditors attempt to re-age a debt. Send a credit dispute to the credit reporting agencies. (For information on how to do this read the Bills.com article dispute credit report). Sometimes, when borrowers are in a hurry, they negotiate a pay for delete settlement with the creditor, in order to be done with the debt. Be careful that you do not acknowledge the debt, otherwise you will re-age the debt.
Lower your credit utilization: Pay down your high balance credit cards, and be careful about the credit utilization of your smaller balance cards.
Summary and Recommendations: Shopping For a Car Loan With Good Credit
Your immediate concerns:
- Try to settle or pay in full your medical collection items.
- Either dispute your cell phone collection item (due to its new date), work out a settlement, or pay it off.
- Lower you credit utilization on your credit card balances. In general, avoid making minimum payments, and make a plan to pay fixed payments, so you bring your card balances to zero.
Don’t take a car loan with bad credit. Instead follow these two steps:
- Plan ahead: Build your budget, lower your debt to income ratio, and improve your credit score.
- Shop around: Once your credit score has improved, you collection items are gone, and then you can avoid a car loan with bad credit, and instead shop for a car loan with good credit.
I hope this information helps you Find. Learn & Save.