Q: I just decided I can afford to buy a new car, and now, of course, I want it YESTERDAY. I went to my local dealership, and they were talking to me about my credit history and how that could impact my financing costs. I know I should take a look at my credit report before making a financing decision, but don’t know where to begin. Does it take a long time? How much does it cost? How can I do it quickly? Should I even bother?
A: Your dealer was right -- credit history is one of the most important factors in determining the financing rate you’ll be offered, so it’s in your best interest to familiarize yourself with your credit reports, and give yourself a chance to correct any errors to help you improve your score.
You are entitled to three free credit reports each year – one from each of the three national credit reporting companies.
These free reports will not include your score, but you’ll have an opportunity to purchase that separately. In most cases, you will be able to view your credit report(s) instantly after answering a series of security questions.
Don’t request all three reports at the same time. It’s wise to space out your requests over the span of a year so you can see ongoing changes to your credit record and check if there are persistent problems.
After receiving your report(s), check them to make sure they are accurate, complete and up-to-date before you apply for any financing. Correcting errors – or taking other steps to improve your overall credit score (such as improving your payment history) – will all take time. You do seem like you want your new car right away – but in this case, it might pay to be a bit patient and get your credit file in order.
Q: My son is a rising senior in college. This fall, he started a new internship away from campus. It’s a well-paid job for a college student and I’m proud that he’s finding his way in the working world. But it’s a long bus ride and he’s been thinking about buying his first car. I’ve always taught my children to be self sufficient, but I also want to be there for him. He’ll probably need to finance the car. Is it a good idea for me to co-sign the loan?
A: Co-signing automobile financing with your son can serve as a terrific “teachable moment" to engrain in him the importance of building excellent credit, which will serve him well throughout his life. Help your son learn the common terms associated with financing, such as down payment, fixed- and variable-rate financing, and on- and off-site financing. And make sure he shops around. There are many sources of financing available to consumers -- from banks to credit unions, to dealers -- and it'll serve him well to learn this important first step.
When he's ready, and if you do decide to co-sign, I suggest drawing up a contract with your son that stipulates rules he must follow in order to have you help him with financing. I would suggest setting a total maximum budget for this purchase; stipulating how much per month he is required to pay for the car; and how much he is required to save to repair the car and pay for insurance.
By co-signing for the financing, you will, most likely, help him get a lower financing rate given your higher earnings, credit history and other factors that determine risk. Moreover, if he makes timely payments, you will help him improve his credit record, putting him in a better position to secure more competitive financing on his own in the future. But it is important to remember that as a co-signer, your credit will be affected if he doesn't make payments in a timely fashion. The bottom line: you are assuming joint responsibility for this loan. For it to be a positive experience, you must communicate very clearly with your son, in writing, about every aspect of this automobile purchase.
If you follow these rules, you and your son are likely to have a positive experience that will serve as a life-long lesson about the importance -- and reward -- of building good credit.
Q: Three years ago I bought a new car when my credit was less than perfect. Since then, I’ve worked hard to clean up my credit and ensure that all my bills are paid on time. Recently, I heard I could refinance my car loan without penalty. Is this true? And since I’ve improved my credit, do you think I’ll be able to get a better annual percentage rate?
A: Congratulations on getting your credit report cleaned up. Having a strong credit history is hard work, but the rewards that come with it, namely opportunities for more competitive rates, are worth it.
Yes, you can refinance your auto loan and typically there are no penalties to do so. Refinancing might be your best option, but it will depend on a number of factors, such as the remaining balance of your existing loan, the difference between your old finance rate and the new finance rate, the term of your new financing, and finally how much you improved your credit score.
You should check your original contract for any conditions surrounding refinancing and get an updated copy of your credit report before deciding to refinance. Your credit report will show you what creditors see, and give you a chance to correct any errors that may be on your report.
Next, shop around for financing. Check annual percentage rates and other refinancing terms from the many sources available. Once you understand the terms available to you, you will be able to determine whether or not refinancing makes sense for you.