Ep.4 Credit Score and Car Buying

Understanding Credit Scores and Their Impact on Car Buying

In this episode of 'Women Buying Cars, host Meredith Reynolds, a former teacher turned used car dealer, educates listeners on credit scores. Meredith explains what a credit score is, how it affects the ability to purchase a car, and the financial impact of different credit scores on loan terms. She highlights real-life examples, provides actionable advice for building and maintaining good credit, and emphasizes the importance of understanding credit reports. Additionally, she encourages young people to learn financial responsibility and offers tips for those facing challenges due to poor credit. Listen if you are wondering, "Can I afford a car?" "Can I buy a car with bad credit?" "Is my credit score ok for buying a car?" "Will a high credit score get me a better interest rate?"

00:00 Introduction and Important Update
00:24 Welcome to Women Buying Cars
00:44 Understanding Credit Scores
03:48 Impact of Credit Scores on Car Buying
12:17 Tips for Building and Maintaining Good Credit
13:43 Preparing for a Car Purchase
16:51 Final Thoughts and Encouragement
20:06 Conclusion and Call to Action

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Transcript

0:01

Hi, everyone. Before we get to this week's episode, I wanted to give you an update. Between recording it and airing it, a bill has successfully made it through Congress that will remove medical debt from credit reports. This is great news for millions of Americans, and I wanted to let you know that that has changed since I recorded this episode. Let's get to the show.

Meredith 0:29

You're listening to Women Buying Cars and I'm your host, Meredith Reynolds. I'm a former teacher turned used car dealer, and I'm here to teach and empower women to walk into a car dealership with confidence and walk out with the car that's right for them. Hi, everyone. So today we are talking about credit scores, what they are, how they work, How they affect your ability to buy a car, and how they affect how much you'll pay if you are financing the vehicle. Credit scores, honestly, are what inspired this entire Women Buying Cars podcast. I was a teacher for 18 years. I left teaching and now work with my husband selling used cars. And one of the things that has really bothered me in this business is how often I see 20 somethings with terrible credit. It really limits their ability to buy a car and they take drastic measures to try To buy things like going to high interest lenders and taking out like payday loans and getting further and further in debt. And I just wanted to do something to teach people how to take care of their credit, what their credit is, and why it is so very important to guard your credit. And take good care of it. Now I do want to preface this by saying there are many, many things that can hurt our credit that are beyond our control. This episode is not passing judgment on people for really any reason, particularly not for people who have gotten into medical debt. Because that's an impossible situation. If your child needs chemo and you have an 8, 000 deductible and you don't make a really high salary, what are you supposed to do? You're going to charge up your medical bills and you're going to get to them when you can because that's, doesn't really matter. Saving your child is what matters. Okay? And, and that. Scenario could be taken in a million different directions, but certainly medical debt. I do not believe should be on your credit report at all. And there are some bills floating around Congress to try to change that as of now that hasn't happened, but I really hope someday that it does. I'm not gearing this show towards situations like that. another one would be a divorce or a spouse. Certainly, if you think your spouse is paying the mortgage every month and they're not, you are affected by that. What I'm really trying to gear this toward are people who just don't understand or are making poor decisions and not realizing that they could stop those poor decisions to help their future selves. I really want you to share this episode with the young people in your life. Make your teenage child sit down and listen to it. It's not going to be fun, but this is so important because they're going to be out on their own. After 18, they start building credit and it can be good credit or bad credit. So if you can get to those kids in advance and teach them about credit scores and about finances in general, the more you do, the better. 20 somethings in your life. will also greatly benefit from this. So please share this. That is why I started this podcast, because I really want to help people. So what is a credit score? A credit score is a range from anywhere from 300 to 900, though I have never seen either one of those numbers on a credit report, but theoretically 300 to 900. What it does is tell a lender how likely it is that you will pay them back if they loan you money. When you take out a loan, that is a huge risk for the lender because they're taking a chance that they will never get their money back. That is a real possibility. Your credit score tells them how well you have paid people back in the past. Whether that is a credit card, a mortgage, another car loan, even how well you pay your utility bills. Okay, so when we run a credit score, we are looking at a number. For a car loan, we would love to see that number above 700. If it is in the 600s, you will likely still get a loan. But the terms won't be as good. If it is below 600, it gets increasingly more difficult. Personally at our car dealership, we work with a handful of credit unions, and we have two that would consider you if you were in the five hundreds. If you're below 500s, I doubt I could get you approved by anyone. The higher your credit score, the lower the interest rate you're going to be given will be. Okay, so let's look at one car. Under two scenarios, the first one is a customer with a credit score in the upper 700s or 800s. They want to buy a car that's 15, 000. At the time of this recording, I'm going to say someone in that scenario would have an interest rate of around 7%. They'd be paying around 300 a month. And over the course of a five year loan. They would pay 2, 800 in interest. So at the end of five years, that 15, 000 car actually cost them 17, 800. The next customer is looking at the same 15, 000 car, but they have a credit score in the low 500s and they are offered a 28 percent interest rate. Instead of a 300 payment, they have a 470 payment and instead of 2, 800 interest over the course of the five years. They're paying 13, 000 in interest on their 15, 000 car. Over the course of five years, that 15, 000 car actually cost them 28, 000. These are things that we see every day. And it just kind of makes me sick for that second person and also because they have no other option. I was able to get them one approval, and that's it. The first person with the 800 credit score, they had multiple offers, and we were able to select the best one. I have a lot of customers who focus on that monthly payment, and say, well, it's under 500, that was my goal, so I'm okay with that. I understand, you need to think about your budget, and that's great, but they ignore how expensive this car really is. And I wish they would take the time if they're able to continue driving what they have, work on their credit score, and come back when they're in a better position to get a better interest rate. Additionally, a bank is going to ask for a larger down payment if your credit score is low, because they need to see that you are invested in this. You're less likely to default on a loan. If you had to put 5, 000 down already, people with really high credit scores, eight hundreds. They may not have to put any money down, okay, because the bank feels that they are a smaller risk, and they have more confidence in getting that loan repaid. Along with your credit score, a lender is also going to be looking at a credit report. And that goes along with your score, and it tells the story of how you got to this particular number. When we pull your credit. Before we send it to a credit union, we look it over to have a clue as to which of the banks we think will take you, if anyone. And we can see things like how many loans you already have. If you already have a car loan, it's going to be harder to get another one unless you are married and have a spouse that's co signing with you or a parent or something like that. We can see how many times you have been late. On that car loan, and that is going to have an effect on whether or not a bank wants to take you on if you continuously pay your car loan late or your mortgage late or any of your bills late, that is a bad sign. So it's very important that you're paying your bills on time. The credit report also shows a debt to income ratio. You could have a decent credit score, but have a poor debt to income ratio, meaning. You have a car loan. You have a mortgage. You have a loan on a boat. You have your furniture for your house on credit. You have other credit cards with high balances. This is showing a high amount of debt. And there, that's going to be compared against your income. Even if you're making your payments on time, even if you have a decent credit score, you still might not have the best terms, meaning not the best interest rate and a requirement of money down. Because you have a poor debt to income ratio. So if you can do something about that before you go get a car loan or any loan, I highly recommend it. Go through and see if you can pay down or pay off these credit cards. Some of them at least. These are things that you need to do because you are more than just a number and that can be to your benefit but it can also be to your detriment depending on what's in your credit report. Another thing a bank is going to look for is if you've ever had a car repossessed. That is a huge red flag, as you can imagine, and that is a huge risk for a bank to take on to give you a car loan if you've proven in the past you didn't pay your car loan. Sometimes people talk to me about quote unquote voluntary repossessions. They realize they can't pay for the car, so they go back to the dealer and say, I can't pay for this and give the car back. That is still a repossession for your credit report. It doesn't look any better than if the car dealer had to send out a tow truck and take the car from you. It shows that you get in over your head and you don't pay your bills. I understand there are situations that can occur. Like I said earlier, sudden medical bills, et cetera. So I'm not judging, I'm just saying that to a credit union or a bank who looks at application after application after application, and honestly a lot of these are approved or not approved first by a computer system. To them, you are a number. You're one of many applicants. and they have to mitigate the risk. And someone with any type of repossession is a huge risk. The items on your credit score and your credit report are going to stay there for about seven to ten years. And that's why it is so important to make good financial decisions. Because this could be following you around for a decade and getting in the way of your ability to buy a house, to buy a car, and to live the full life that you really want to live. I would rather see a 20 year old come in with no credit score than come in with a credit score in the 500. You start building your credit score, or you can, at the age of 18. My goal for any young people listening to this is to, at age 18, begin deliberately building your credit. Not just getting a credit card and seeing how it goes. deliberately building it. So at 18 I would suggest having a credit card in your name and that is only used for items you can immediately pay off. I would use it for groceries, for shampoo and necessities that you absolutely will be able to pay for next month when the bill comes. If you are charging things that you probably can't fully pay off the next month, you are already getting yourself in debt and creating a poor credit score. So charge. A hundred bucks, a couple hundred bucks. When the bill comes next month, pay it off and don't be late and repeat. If you do that, you will start creating a positive credit trail. And this is what so many people I have seen did not do. When it's time for you to go get a new car. Before you go to the dealership, I would like you to take a look at your credit. You can get a free report once a year from Equifax. com. You can get another free one from Experian. com and you can get a third free one from TransUnion. com. I recommend you spread those out across a year and check your credit three times a year to make sure everything's going well. And also to check for any fraud or any identity theft. So before you go to the dealership, go to one of those, check your credit, and go in knowing what your credit score is. Be very open about it. If you're applying for financing through the dealership, they have to run your credit beforehand. So, you might as well be open from the beginning, let them know what your score is and what they think you might be able to purchase before running your credit. Sometimes people are very concerned about their score dropping because they've had their credit run. First of all, when you check it at one of those three I listed, that does not affect your score. Second, if you go to one or two dealerships and they check your score, it's going to be A very small amount. If you go to 10 dealerships, it's going to have an impact on your score. Each time it's run, it's impacted a little, and that certainly adds up. So do not go all over town having your credit run. Remember, when we run your credit, we can see who else has run your credit. And a lot of times when people don't have good credit, we can see that they've been to five or six dealerships having their credit run before they came to me. You're not doing yourself any favors. You're wasting your time and you need to talk to people about your credit score before they run it. You know what the score is, so let them know, and they'll be able to hopefully direct you toward a car that is likely to get approved. A bank may not want to loan you 30, 000, but they might lend you 12, 000 for this other vehicle. Trying to speak to the finance director or someone in finance about your credit score in advance will help guide you toward the car that you can actually get an approval on. Because a lot of times for banks, it's not an all or nothing. It might be an all or nothing on one vehicle, but like I said, on a cheaper vehicle, you might have more of a chance, especially if you have a down payment. If you have a credit score below 700, you need to be prepared to have a down payment. I don't know what that's going to be. It depends on the score, depends on what's on your report. It depends on the bank and it depends on the car. If the car is older with very high miles, that adds another layer of risk for the bank. And they may not want to put a risky car with a risky customer. If you are denied for a loan, I know that a big part of you will want to just turn around and get out of there as fast as you can because it's embarrassing. It doesn't feel good. Before you do that, I want you to start asking some questions about why you were denied, what bank denied you, ask them if you could get approved on a different car, ask them what would happen if you had more money down, even if you don't have the money to put down, ask them what it would take, because then you know what you need to start saving for. Do not just go to the next dealer and start all over. There's a chance that that dealer may be sending your credit score to the same banks that just denied you. Not only is that wasting your time, it's hurting your credit score. So ask them what banks they use, who rejected you, what you could have done differently, and use that information wisely. If you don't need a car right now and your credit is challenged, If you're only wanting a car, then I recommend you don't get one yet. Work on raising your credit score, work on saving for a down payment, and come back when you've taken care of those things. Because getting a new car now because you want it could cost you thousands of dollars more than it would if you waited a year, raised your credit score, save for a down payment, and then was able to get a better interest rate. I understand that a new car is exciting. We would all love a new car. And by new, I mean new to us. I have a particular vehicle that I really want. When I see it on the road, I feel a pang of Jealousy. But I don't have one. I could get approved for a loan, but the payment would be high because it's an expensive car, and I don't really want to pay that every month. So, I'm not getting it. We have to be able to be comfortable with not getting luxury items we wish we could have. It's hard, especially if you're surrounded by people who have them. Social media has made it very hard to be humble, to be content with a vehicle that's maybe not super exciting and super expensive. Social media has made us think that everyone else lives rich, so we deserve to live rich too. But you have to ignore all that noise. because people are going in debt to keep up with what they see on social media. Don't let that be you. Just got to start thinking of your credit score as your future and thinking about your future self and what your future self would like to be doing five years from now. Guard your credit score like it really matters because it does. It's not fun. Going without is not fun. Paying bills on time, there's nothing fun about that. But walking out of a car dealership with the vehicle that you love is fun. And that's what I'm here to teach you about. Hey, thanks for listening. If this has helped you at all, please give me a five star review, subscribe, share this episode. It really helped me build the show. Thanks for listening and happy driving.