Your Car Loan Preparation: Understanding Credit Bureaus

car

Before you head in and buy that new (or used) car that you need now, you should know your credit history inside out. The information contained therein determines what kind of rates you get, as well as the maximum amount for which you’re eligible and likely to receive from the dealer.

This information is readily available from the credit bureaus, and they are legally obligated to send you this information for free one time each year that you request it. As for which credit bureau is most used for auto loans, there are three of them that you should always use when you’re preparing to hunt for the best interest rate you can get: Experian, TransUnion and Equifax.

How Do Credit Bureaus Work?

First of all, it’s important to understand that there are more than three credit bureaus; the ones listed above are simply the largest by far. These are for-profit companies that use different methods to calculate your credit score, which is a numerical assessment of your trustworthiness as a borrower.

Why do the numbers differ even by a small amount, given that your “trustworthiness” metric is tied to a singular person – you? Well, there is no federal requirement that lenders must report their data on your transactions with them to the reporting agencies, which necessitates the creation of algorithms to reliably fill in the blanks. The data is really a reliable as can be expected, because it’s valuable – TransUnion, Experian and Equifax sell it to creditors who want information on your creditworthiness to facilitate business with you.

In order to ascertain the legitimacy of the information on these reports, you can visit a single federally-funded portal to cross-check the reports from all three credit bureaus. That website is here at AnnualCreditReport.com.

Finding Discrepancies in Your Credit Reports

credit report

This one is very important if you’re in the market for a car loan. The benefit of having several large agencies compiling your data using different sources, is that you can cross-reference each one to find mistakes that, once rectified, could improve your credit score. Although the score isn’t precisely the one used by lenders, it’s related and could result in better interest rates on the auto loan.

Additionally, what you thought of as a lower score may be a fairly good one. How is this possible? The credit score is looked at differently when an automobile loan is on the line than when there’s a mortgage loan in question. A low score for the latter is usually not such a low score for the former. And if you doubt the likelihood of there being an error, the Federal Trade Commission conducted a study that showed up to 20% of Americans have errors on their credit files!

The minute you discover one, make sure you notify each of the three credit bureaus using the online forms that are provided for the purposes of dispute resolution. Credit Sesame has a truly comprehensive web page on all the attributes of the different credit reports that you can expect from each of the three major bureaus. For reference, a perfect credit score is 850 – but this cannot be effectively maintained if you intend to utilize it; the second you make an inquiry it drops down a few points. Fair credit lies between 550 and 639; a good FICO scores fall between 640 and 719, and an excellent score rises above 720.

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