What credit score is needed to buy a car?

If only going out and buying a car was that easy. There are several things you need to consider before getting started, including your credit score. Auto lenders will check your credit score, and the fact is, it’s a determining factor in your monthly payment.

In this blog, we’ll discuss what credit scores are, what the numbers mean, and what you can expect from the dealership.

What is a credit score?

We’ve all heard the fancy car sales ads saying, “Good credit? Bad credit? No credit? We can get you in a car today!” but what they don’t mention is that your credit score greatly affects what you will pay. The US Consumer Financial Protection Bureau (CFPB) says companies use a mathematical formula to create your credit score based on your credit history. The dealership will use your credit score to determine the interest rate you will pay on your car loan.

Things that affect your credit score

CFPB says there are a number of factors that affect your credit score, such as:

  • Have you ever defaulted on a loan?
  • How many loans do you currently have outstanding?
  • How much debt do you currently have?
  • Are you making monthly payments on time?

These are just a few of the factors companies look at to determine your credit score and, therefore, your interest rate.

How do I know my credit score?

Some banks offer monthly updates of your credit score, showing whether your score has gone up or down. If your bank does not offer this service, you can request your credit score and how it was determined by contacting one of the three major credit bureaus.

Equifax, Experian and TransUnion offer this service to AnnualCreditReport.com or by calling toll free 1-877-322-8228. You can request this information for free each year. Reports and information from these offices are totally free; they’re not trying to sell you anything, whereas other companies offer to tell you your credit score and then may try to sell you by asking their company for a loan (which may not be in your best interest).

It’s a good idea to request your free credit report every year, even if you don’t plan to buy a car. Review each element of your report. Some items may not belong to you. Some items may have already been resolved, but are not displaying correctly. Some items you may have simply forgotten, like an old credit card account from a store you used to shop at.

Dispute any items that are not correct and clean up your report as best you can. It’s definitely a good idea if you’re going through a divorce or recently divorced, as your credit report may reflect things from your ex-spouse.

What are FICO and Vantage scores?

Fair Isaac Corporation (FICO) and VantageScore are basically the same as a credit score. Both agencies collect information from one of three bureaus – Equifax, Experian and TransUnion. The main difference is in automatic FICO scores and VantageScore can weigh unique aspects of your credit history differently.

In fact, Experian says FICO has industry filters, including for auto loans. This means that FICO weighs more heavily on your previous auto loans than on your credit cards or mortgage. Dealerships may choose to view your FICO or VantageScore instead of your credit score. And unlike credit scores, which range from 300 to 850, a specialized automatic screener from FICO has a range of 250 to 900.

Seems unfair, right? How do you know what scores your dealership is looking at? This is when interest rate shopping becomes important. What is your bank willing to lend you and at what interest rate? Check your credit union. Consult other dealers. Lower interest rates will save you a lot of money over the life of the loan.

Ready to buy now? If you’re looking for a new car, we can put you in touch with a trusted CarPro certified dealership.

What do my credit score numbers mean?

Your credit score will be a three-digit number between 300 and 850. NerdWallet explains that a credit score between 720 and 850 is considered excellent. An excellent score will allow you to obtain better interest rates on your auto loan and could even qualify for 0% financing at participating dealerships.

So what if your credit score is below 720? A score of 690-719 is considered good credit and still gives you some leeway at the dealership. A score of 630 to 689 is considered fair credit, with anything below 629 being considered bad credit.

What credit score do I need to finance a car?

As you’ve probably guessed, the higher your credit score, the better the financing rate you’ll get from the dealership or the bank. According NerdWallet, a credit score of 661 or higher should earn you an interest rate of approximately 4.03% for the purchase of a new vehicle. Compare that to someone with a credit score between 300 and 500 who will pay around 12.34% interest on the same purchase. It’s easy to see why a good credit rating is important.

How about buying a used car? Interest rates will be higher regardless of your credit score when buying a used car. So let’s look at our example above, but this time apply current rates to a used car purchase. A credit score of 661 or higher has an interest rate of around 5.53%. Prepare for the shock: a bad credit score between 300 and 500 will pay an astronomical rate of around 20.43% for the same used car purchase. Yeah.

Numbers like that are scary, and not knowing your credit score is scary too. Click yourself AnnualCreditReport.com or call toll-free 1-877-322-8228 to get your free credit score?

How can I increase my credit score?

There are simple ways to boost your credit score. Start by correcting any incorrect information. Forbes suggests always paying your bills on time and repaying your debts. Take a look at your credit cards. Are they maxed out or do you have multiple cards with high balances relative to your credit limits? Generally, you want your credit cards to be 30% or less of the maximum credit limit. So if you have a credit limit of $10,000, you will only want to use $3,000 or less of that line of credit.

Don’t pretend at the dealership

There’s no point in hiding your credit score when you’re in a parking lot or shopping for loans from banks. They will quickly find out. Your credit score is what it is. But as the saying goes, knowledge is power. If you’ve done your homework to get your credit reports and clean them up as best you can, take that information with you to show that you’re working on building better credit.

Bring your cell phone bill, electric bill, and even your mortgage or rent statements to show that you paid your bills on time and that all accounts are up to date. Anything that shows you’re making a concerted effort to raise your credit score and are able to afford a car loan. Dealerships and banks have some leeway. Show them that you are aware of your score and that your current efforts do not reflect what may have happened in the past. They may just give you that break you’ve been looking for.

Your credit score and new car purchases

Your credit score greatly affects the interest rate you will be offered on a new or used vehicle. It’s worth cleaning up your credit reports and shopping around for interest rates before you hit the dealership. If you’re worried that your credit score isn’t good enough to earn a decent interest rate, bring evidence to show that you’re working to improve your credit score.

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