Your New Car and Your Credit Scores

You've probably laughed at the TV ad with the guy driving an old beater instead of a shiny new car – It seems he didn't pay attention to his credit scores and was denied a loan on the car he really wanted.

The ad is funny, but the reality is not. It's just another reason why you should pay attention to your credit rating, and work hard to keep your scores high.

If your income is high enough, you might still be able to buy the car you want with marginal credit scores, but you'll pay almost 3 times as much in interest than you would with a high credit score.

Research shows that a borrower with a score under 600 will pay over 18% for a car loan – while a borrower with a score over 720 will pay only 6 5/8%. As you might expect, the difference in the payments is staggering. On a $15,000 car purchase, the difference in the first year is about $1,700 – or $142 per month!

If the high payments weren't bad enough, insurance companies also charge more if your credit score is low. While there doesn’t seem to be a correlation between credit scores and driving habits, there is a correlation with regard to paying the premiums regularly and on time. Insurance companies like to have their money, so they charge more at the outset, knowing they might not get the full premium.

Rather than use the FICO score in its pure form, insurance companies use a variation called an “insurance score.” This is recently coming under fire and several states are now regulating what information insurance companies can use. Before long, they may be limited to looking at your actual payment history, but that won't help you today.

To find out the regulations where you live, go to your State’s Department of Insurance website.

Remember that in addition to your credit score, lenders consider the amount of your own money you are investing in a purchase. You’re obviously less of a risk if you’ve made a substantial down payment. On the other hand, if you have nothing invested you're more apt to simply walk away if the going gets tough.

Wait until your scores reach 720 to head off for the car dealership – you'll end up with a nicer car for less money.

You may already be there – check your credit score today with a free credit report from Credit Score Cowboy.

About the author: John Rasor is the owner of Dallas, Texas based http://www.creditscorecowboy.com/ Credit Score Cowboy is one of the most unique on line resources in the world for free credit score reports, free credit scores, secured credit cards, identity theft protection and a BLOG with a wealth of information about credit and how to raise your credit score.