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Credit Report Facts
The Importance of Your Credit Score

Bertha's finally thrown in the towel. That's right — after umpteen years of faithful service, your trusty old clunker of a vehicle has proven to be not quite as enduring as you'd hoped (may she rest in peace), and the time has come to replace her with another car. As your experience with Bertha proves, you're the sort of consumer who is unmoved by the hollow glamour of having a new car every two or three years; sensible and practical, you like to drive your vehicle for a long, long time. Car leasing, therefore, is not an option; you're looking to buy. And, like many car buyers, you'll need an auto loan to cruise out of the dealership in that attractive ride that's caught your eye.

But wait: Before you apply for a car loan, it's important to understand exactly what sort of information plays a part in determining its conditions. Prior to tossing any pennies your way, lenders will be taking a close look at certain aspects of your financial background. They'll want to know how much money you make, and how much your home, car and/or other assets are worth. They'll want to know how much money you have in the bank. And they'll want to know everything about your credit history.

Credit history is a somewhat mysterious concept to some people. With those individuals in mind, we'll start at the very beginning: What is credit, and why should you care?

Your credit has to do with your history of bill payment: how much you owe, to whom it's owed and whether you've made your payments on time. This information means a lot when it comes to securing a car loan (or any loan, for that matter) and impacts the interest rate that you will be charged. Interest rates on car loans vary widely based on one's credit history; it isn't uncommon to see a spread of six points or more between rates charged to those with excellent credit and those whose credit history is blemished.

Of course, your credit information doesn't just materialize out of the ether. It's monitored and compiled by the nation's three credit bureaus: Equifax, Experian and Trans Union. These three agencies gather data obtained from credit grantors all over the country. If you've ever owned a credit card or borrowed money from any large organization, be it a credit union, bank or finance company, rest assured that the lenders involved have provided data regarding your account to the credit bureaus, which, in turn, have this data stored in their massive computer database. This information is packaged and sold (usually to prospective lenders seeking to learn about your credit history as a means of qualifying your request for a loan) in the form of a credit report. It's important to note that the credit bureaus themselves don't approve or deny your loan. They merely report on your background objectively, providing the data that's then used by grantors to make lending decisions.

Your credit report is ground zero for lenders who are considering you for a loan; this document offers a comprehensive look at your credit history. In addition to information that specifically concerns your payment history, credit reports also show data such as your social security number, addresses at which you've lived, tax liens (if any) and recent credit inquiries. Most payment-related information remains on your credit report for seven years; after that, it falls off automatically.

Information found on your credit report is used to tally your credit score (also known as your credit bureau risk score). This is a make-or-break number when it comes to obtaining your loan; it provides lenders with a speedy way of judging your creditworthiness. To calculate your score, about 30 different credit-related factors are considered. Determinants such as your payment history, amount of outstanding debt and the length of your credit history all play a part, and the formula used weights each factor according to its relative importance.

The preceding information should help bring you up to speed on the basics of credit, but it is, of course, merely the tip of the iceberg. For a more detailed look at credit reports, please see Understanding Your Credit Report; for more information on credit scores, take a look at Credit Scores, Demystified. Insight regarding credit, in general — and the state of your own personal credit history, in particular — can prove extremely valuable in helping you obtain the cheapest possible auto loan for the purchase of your car.