When you’re buying a car, it’s important to keep your creditworthiness in mind. If you don’t have the best credit score and need an auto loan for financing, consider taking out a bad credit car loan instead of going through traditional routes with higher interest rates attached to them.
Bad credit loans in Ottawa come with some risks, such as less favorable terms and high-interest rates, so here is how you can manage your credit score and purchase a car without emptying your pocket.
What is a credit score?
Your credit score is the number representing your financial responsibility. As in, how responsible are you at repaying debts and not getting into trouble with creditors or lenders? It ranges from 300 to 900 points, where higher scores indicate that you’ve been good about managing finances. While it’s only one part of determining if a lender will approve you for an auto loan- they’ll also look at debt to income ratio, monthly salary/income, etc.
Credit score depends on five of these pointers.
- Payment history
Your payment history accounts for 35% of your credit score, and it’s calculated based on how you’ve paid debts in the past. The more consistent and timely payments you make while keeping a clean slate, the higher chance you’ll have at building good credit over time.
- Used credits vs. available credits
Knowing your credit utilization ratio is important for maintaining a solid credit score, accounting for 30% of your overall FICO score. A good number would be no more than 7-9%. The key to managing this percentage properly lies in paying attention to the amount you’ve used versus what’s available on all revolving accounts or debts that show up on file.
- How lengthy is your credit history?
Your history of credit accounts open makes up 15% of your score. This is the number for how long all average credit accounts have been opened with any financial institution or lender. The longer an account has been around, the better it will look to a potential creditor and increase your overall rating as being financially responsible.
- Public records
The information on your public record accounts for 10% of the score assigned to you by credit bureaus. This includes bankruptcies and other publicly available items, which may negatively impact your ability to be approved for certain loans or lines of credit in the future.
- Credit inquiries
Your credit score can be negatively affected if you have several hard inquiries on your report. These are typically initiated by applying for new loans or other forms of credit. They may also occur due to unpaid bills and collections accounts and past-due payments related to previously existing obligations such as an auto loan.
Why do bad credit loans have a higher interest rate?
A credit score is an indicator that measures how competent you are at managing your money. It also predicts the risk of a default on loan, which would be very harmful to lenders and therefore more costly for borrowers with high-risk loans.
When someone takes out a risky loan from banks, they have to pay higher interest rates to balance their risks because it’s harder for them to repay these loans if things go wrong or don’t work out as planned!
With the help of the factors that help decide the credit score, we hope it gets easy for you to fall back on track. If not, you are always free to contact us and talk more about bad credit loans in Ottawa!