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How does Credit Utilization Impact Car Loans?

How does Credit Utilization Impact Car Loans?

Credit utilization is a factor in any lending decision and something you should bear in mind when considering taking out any debt, including an auto loan.

 

We asked our Cambridge auto loans team to explain credit utilization and how it impacts a lending decision. This is what they came up with.

 

What is credit utilization?

 

Credit utilization is a measure of how much revolving credit you have available and are using.

 

Revolving credit is that which is readily available and will go up and down as you use it and pay it off. This is typically credit cards but can sometimes include other borrowing too.

 

For most Canadians, your credit utilization is almost entirely made up of your credit card use.

 

For example, you have two credit cards with an available credit limit of $5,000 between them. You have $500 outstanding on them both, so your utilization is 10%.

 

Credit utilization is calculated using your total amount of revolving credit. The more credit cards you have or the higher your credit limit, the better.

 

How does credit utilization impact an auto loan application?

 

Credit utilization makes up part of your credit score. In fact, according to Experian, it makes up 30% of your score so is worth taking notice of!

 

Most lenders like you to have credit utilization less than 30% of your available credit.

 

So, in the example above, you could theoretically have up to $1499 outstanding on credit cards with a $5,000 credit limit and still be under the ‘ideal’ limit.

 

This, along with the high cost of credit card interest, is why we always recommend keeping credit card spending under control and paying off the balance each month.

 

It’s also why sometimes it’s a good ideal to leave credit cards you don’t use open for a while. At least until you have qualified for your auto loan.

 

The credit limits of all available cards are calculated in credit utilization, including cards you don’t use. Unless they charge for inactivity or have a monthly fee, keep them open until you get your loan.

 

Other impact of credit utilization

 

While there’s nothing wrong with having a high outstanding balance on a credit card, if you carry too much from month to month, the lender may wonder why.

 

As credit card debt is expensive, nobody would willingly want to carry it. Therefore, a lender might wonder what else is going on to prevent you paying down those cards.

 

They may look deeper into your situation to try to ascertain why you’re not paying off your cards and whether you really can afford the auto loan or not.

 

Not all lenders will do this and some will just look at the numbers. Some lenders we know will look a little further into an application if there are higher credit card balances without good reason.

 

Just something to be aware of.

 

We will use all our skill and experience to deliver the lowest possible Vineland auto loan rates, guaranteed. Contact Car Nation Canada Direct to learn how we can help.

 

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Categories: Auto Loan

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