Surety bonds are a central licensing requirement for auto dealers in most states. To get bonded, you apply with a surety company, which offers a premium. Premiums vary depending on your financial stability, with credit scores being the most important factor.
The higher your score, the lower your auto dealer bond premium will usually be, and vice versa. Yet premiums are not fixed, and by improving your score, you can secure increasingly better rates on your bond.
Let’s review the key factors at play and discuss three critical steps you can take to maximize your dealer credit score — and your savings.
How Bond Costs Are Determined
The bond premium, or bond cost, is equal to a percentage of the total amount of the bond. When issuing a bond, sureties will want to review an applicant’s finances to determine the premium. In doing so, they will review the following:
- Personal credit score.
- Personal and business financial statements.
- Liquidity and assets.
- Industry experience.
- Choice of a bonding agency.
While all of the above factors play a part, your personal credit score has the greatest influence on your premium. So by improving your credit score, you can significantly influence the rate at which you can get bonded.
How Do Bond Rates Vary?
Bond rates are determined on a case-by-case basis. Yet, as a general rule, rates for applicants with very high FICO scores — 700 or above — vary between 0.75% and 1.5% of the total bond amount. Applicants with a slightly lower score, around 650, and those with a score below that are usually offered a rate in the range of 3% to 10%.
In other words, the difference between getting a $30,000 bond at 1% and 10% is the difference between paying $300 or $3,000 for your bond.
How to Improve Your Credit Score
Nothing will influence your bond rate as much as improving your credit. Here are a few tips on how to go about raising your score.
1. Eliminate inaccuracies. As many as 25% of all credit reports have serious mistakes in them. Request your free credit report from one of the three major credit bureaus and review it for errors. If you spot any, contact the bureau and provide proof to refute the errors.
2. Manage your payments. Successfully managing your various payments can vastly improve your score. Start by paying off any old and missed payments — including civil judgments, taxes, and collections — and then try to keep up with payments as soon they come in.
Strive to make bill and credit payments regularly, on time, and above the minimum payment amount.
Set up payment reminders to help you keep track and pay on time. Even a few days’ delay can influence your score.
3. Reduce your debt. Your amounts owed are responsible for another 30% of your credit score. To reduce your debt, start by taking care of payments on credit cards that charge the highest interest.
Meanwhile, reduce payments on other accounts and try to keep balances low — at least 30% under their limit or more. This will reduce your credit utilization ratio, which is a good thing.
Do not open new credit cards that you don’t need. But don’t hurry to close any unused cards either as long as you don’t have to pay fees on them. This too can positively influence your credit utilization ratio.
Finally, always strive to pay off revolving debt, rather than move it around.
These are some of the main ways you can improve your score, and as a result, get increasingly better rates on your auto dealer bond. To find out more about how you can improve your score, consult a credit counselor who will help you draft a plan for managing your credit.
Do you have any more questions about auto dealer bonds and how to improve your credit score? Let us know in the comments below!
Todd Bryant is the president and founder of Bryant Surety Bonds.