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Credit Ratings: Get the Credit You Truly Deserve

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Much like a report card, your credit rating should accurately "grade" your past behavior as a borrower. Lenders base the negotiation of loan rates on what is called a FICO which is your credit rating, therefore it's a good idea to become familiar with your credit report before applying for a loan.

First things first—know your credit
Knowing your credit history before you apply for a car loan can help avoid any surprises and possible delays. According to a 1999 study by the Public Interest Research Group, 70 percent of credit reports contain at least one mistake. These mistakes can range from a dispute with a creditor to a random reporting error. With a copy of your credit report in hand, you can correct any errors well before shopping for a new vehicle. Correcting any errors or discrepancies on your report before you apply could result in a lower interest rate, saving you money.

There are three major credit-rating agencies sanctioned by the US government to report on your credit history—Experian (formerly TRW), Equifax and TransUnion. Each of these bureaus provide online dispute correction if you find errors on your report.

A free credit report is available online on a one-time trial basis. It is best, however, to procure reports from each of the three bureaus to insure accuracy. Each of these reports are available from Experian. After that, you'll be fully aware of what the lender is looking at when negotiating your interest rate.

Here are a few basic details lenders look for when rating your credit:

Do you pay your bills on time?
Creditors are on the lookout for any indications that may trigger you as a credit risk. One way to ensure good credit is to pay your monthly debt in a timely fashion. A history of on-time payments demonstrate that you are responsible and can be trusted paying back your debt.

Are your monthly debts reasonable?
There is such a thing as too much debt. If you are already committed to paying off other bills such as credit cards, student loans, mortgage payments, etc., the lender may wonder if you will have trouble paying back a new expense, such as a car loan. A good rule of thumb is for your monthly payments not to exceed 10-15 percent of your take home pay each month. If your debt is currently too high, you may want to pay off some of it before applying for another loan.

What do creditors look for?
When looking at your credit history, lenders are quick to note indicators of stability and responsibility. Things such as your monthly income, length of employment, occupation, whether you own or rent and how often you have moved, play an intricate role in defining your lifestyle and how you spend your money.

With insight into your credit history, you can better predict what interest rate lenders will charge, what type of loan you'll receive and whether you'll even be able to get a loan.

To make sure you're getting the lowest rate, be sure to check out what online lenders have to offer. For example, LightStream, an online lending division of SunTrust Bank, offers low rates for new and used cars and refinancing.

Whether you find a loan online or go through a dealer, knowing your credit rating before applying for a loan puts you in a great negotiating position for the lowest possible interest rates, ultimately saving you money on the purchase of your next vehicle.