A good credit score is important for mortgage approval, credit cards, personal loans, and of course, auto loans. The reality is that having compromised credit makes buying a vehicle difficult. A subprime score puts car shoppers at risk of getting denied for an auto loan or having to pay exorbitant interest rates.
Although there are ways to secure a car loan with bad credit, shoppers will have to be ready to make some sacrifices including having a large down payment, enlisting a cosigner, or paying double-digit APR rates. Achieving good credit means having the freedom to purchase the vehicle of your choice, and a recent survey of Credit Karma members lays the groundwork to get there.
Credit Karma Survey Methodology
The good news is that your financial past doesn't have to dictate your future or keep you from your dream car forever. The proof comes from a survey conducted by Credit Karma which questioned members about real and specific strategies they used to dig themselves out of their subprime (580 to 639) or deep subprime (580 or lower) credit ratings.
Credit Karma surveyed over 2,500 of its members who joined with a deep subprime or subprime credit score between 2016 and 2018. These members were able to raise their credit scores by at least 50-99 or 100+ points. For some respondents, the improvements were significant enough to lift them out of the deep subprime, or subprime credit categories. Here are the takeaways from the survey results.
5 Tactics for a Higher Credit Score
There were several common threads among the respondents of the survey who significantly improved their credit scores. 63% of members reported that they paid down their existing debts to achieve a higher score. Other successful strategies included reducing expenses, paying bills more than once in a billing cycle, and paying off a collections account. While these techniques aren't a magic fix and we can't guarantee they will work for everyone, they do provide a framework to build good financial habits and get you closer to the car you really want.
1. Paying Down Credit Cards
A majority of respondents in the Credit Karma survey reported that they achieved a higher credit score by paying down their credit cards. Credit utilization rate is a large factor in the credit score mix, and it's defined as the percentage of the available credit used. For example, if you charge $2,500 every month and your credit limit is $5,000, your credit utilization is 50%. Reducing credit utilization to under 30% is likely to boost your credit score, and paying down credit card balances or increasing the limit is also the fastest way to improve your score.
2. Reducing General Expenses
Another common response among survey participants was that they reduced their general expenses by spending less. This tactic not only reduces overall credit utilization but also makes debt easier to manage. For car shoppers, reducing expenses will have an added perk of helping to save up for a larger vehicle down payment.
3. Pay Bills More than Once in a Billing Cycle
Paying bills more than once in a billing cycle helped many of the survey participants boost their credit scores. There are a couple of good reasons to consider paying more than once. First, this system prevents the risk of making late payments which can damage your credit further. It also helps to control credit utilization on credit card accounts.
4. Setting Up Payment Reminders
The 4th tactic survey participants used to improve their credit scores is one of the easiest but most effective. On-time payment history is a large component of a consumer's credit rating. Scheduling payment reminders and setting up autopay is a simple way to ensure you won't miss a payment or pay late.
5. Paying Off a Collections Account
The 5th and final technique most of the respondents used to significantly improve their scores was paying off or settling a collections account. Although the impact of having an account in collections varies for each individual, it is likely to drag down a credit score. Once paid off or settled, a collections account is marked as "paid collection" and the impact on the credit score is reduced.