Credit is a far more nuanced metric than many realize. Your credit score is not the only bearing lenders can use to determine your qualifications. A typical credit report shows potential lenders a variety of information that can reflect your credibility in equally varied ways.
An important part of your credit report is your “Credit Utilization”. This piece of information can either be your saving grace or the reason for your financial nosedive. Properly managing your credit utilization can help you get approved for a car loan, even despite your bad credit. This is especially important to grasp if you’re trying to buy a used car in Canada, as the majority of purchases are only made possible through lending.
The following guide will break down the credit utilization portion of your credit report, and hopefully help you garner approval.
What Is Credit Utilization
Credit utilization is the dollar amount of credit that you can theoretically be trusted to manage. It tells potential lenders how much actual money you can be lent and expected to pay back in a timely manner.
More importantly, your “Credit Utilization Ratio” analyzes how much of your credit you’re utilizing and how much you hypothetically have left. Let’s say you have $30,000 in credit, but between your credit cards and student loans, you’re currently utilizing $25,000 of your credit. This means that you can theoretically be trusted with $5000 more in credit, before lenders should be wary of your ability to pay them back.
So if you have amazing credit, but are already utilizing most of it, you still might have a hard time getting approved for an auto loan. On the other hand, if you have bad credit, but aren’t utilizing any of it, approval might be easier than you think.
Credit Utilization Rule Of Thumb
While your credit utilization indicates the fullest dollar amount of credit you can handle, it doesn’t mean that lenders have to extend that much credit your way. In fact, most potential lenders prefer to see that your credit utilization is far under what it could be. The lower your credit utilization ratio, the more responsible you seem to auto lenders.
A good rule of thumb is that before applying for an auto loan, you should try to get your credit utilization ratio around 30%. So, if your credit utilization is $30,000, you should preferably only be using around $10,000. This gives lenders a little more wiggle room when extending you an auto loan. Even if a lender is only going to loan you $5000, they’ll want the extra security of knowing that you could theoretically handle even more.
When dealing with auto lenders, it’s always best to overcompensate, over prepare, and do what you can to meet them where they’re at. Keeping your credit utilization ratio under 30% tells lenders, “Hey, I may have bad credit, but I’m clearly capable of managing what credit I do have”. Still, getting your ratio under 30% can be difficult, so here are some tips for maximizing your credit utilization.
How To Maximize Your Credit Utilization
Now that you know everything about credit utilization and how lenders use it, it’s time to learn how you can harness it. Getting your credit utilization ratio down to 30% can be tough, and often requires quite a bit of frugality on your part. However, there are two broad strategies you can use to get your credit utilization back under your control.
#1 – Build Your Credit
Of course the best way to maximize your credit utilization is to improve your base credit score. The better your credit, the higher the dollar amount of credit you can be entrusted with. Raising the ceiling of your credit utilization ratio will help to get it under 30%, but improving your credit is no small feat. Take a look at your credit report and try to find small, or delinquent debts, as they can be the largest but most easily resolved blemishes on your credit.
#2 – Reduce Your Credit Usage
Alternatively, simply reducing the amount of credit you’re using before applying for an auto loan can also drastically improve your ratio. If improving your credit is raising the ceiling, this is lowering the floor, and is a much easier way to get under 30%. Any unnecessary credit cards, payday loans, or other credit black holes need to be cancelled or resolved immediately. It’s simple, the less credit you use, the more you have.
Whatever your credit or credit utilization ratio, Ridetime works with lenders whose prime directive is getting you approved. They’ll work with you to manage your credit and get it into a condition everyone can live with. Ridetime understands that often the Canadians who most need a used vehicle are the one’s whose credit can most hold them back. Don’t let that stop you, check out Ridetime and their roster of lenders today