Only people with bad credit truly know the disappointment of trying to apply for a car loan or a house mortgage and ultimately fail because of three digits. Though a credit rating should not be viewed as a measure of your integrity, it does reflect your current financial stability.
What Is Bad Credit and How Is It Calculated?
Generally speaking, a credit score lower than 600 is considered a bad credit rating. The credit score spectrum ranges from 300 to 850 and is computed by a credit score company of your choice. Still, these credit score companies are only responsible for tabulating and computing your score. The ones who actually deem you credit worthy or not are the financial institutions to which you are applying for a loan or mortgage.
Credit scores are usually computed using the following formula: 35 percent on payment history; 30 percent on current debt (e.g., remaining student loans and other types of loans), 15 percent on loan history or how long it took to pay off a single loan; 10 percent on newly opened accounts; and 10 percent on types of credits used. Scoring low on any of these damages your financial credibility as it pertains to loans.
Why Do Auto Financing Companies Approve Bad Credit Loans?
At first glance, it seems counterproductive for auto financing companies to approve used car loans for bad credit, not to mention flexible payment methods. After all, people with bad credit scores reach such status by demonstrating either delinquent payments or inability to pay at all.
However, auto financing companies understand that low credit scores can even be accorded to those who manage their debt well. For instance, if you own just one credit card to purchase every necessity, even though you always pay everything you owe fully and on time, you can incur a low score. This is because the credit score formula grades the volume of usage on a card. In this case, usage is high. Therefore, the user is penalized because he or she is using the card too much, regardless of the fact it is the only card the user owns and payments are punctual.
Another reason automobile lenders allow bad credit loans centers on the fact that a huge segment of the consumer market already carries poor credit or no credit at all. Because of its size, it is a good market to tap. As ridiculous as it sounds, if you possess no debt you are liable to still receive a low credit score. To understand this, you must revisit the main criteria in computing your score: Credit score companies rely heavily on your credit history to compute your rating. Therefore, a void of any debt history means zero evidence exists that says you are a good credit risk.
In short, don’t despair from your low credit rating. Simply begin the process of applying with an auto financing company. Bring current documents demonstrating you are now able and willing to make arranged payments on time. This may be all it takes to get a loan, a car, and your credit record back on track.
What Is My Credit Score, and How Is It Calculated?, Time.com
3 Reasons Responsible People Have Bad Credit Scores, Forbes.com