How Your Credit Score Affects Your Purchasing Power When Getting a Vehicle
If only going out and buying a car was just that easy. There are several things you have to take into account before you make the plunge, including your credit score. Auto lenders will check your credit score, and the fact is, it’s a big 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 to happen at the dealership.
What is a Credit Score?
We’ve all heard the gimmicky 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 your credit score greatly affects what you'll pay. The U.S. 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 what interest rate you’ll 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 open?
- How much debt do you currently have?
- Do you make monthly payments on time?
These are just some of the factors that companies look at to come up with your credit score and therefore your interest rate.
How Do I Know My Credit Score?
Some banks offer monthly credit score updates, detailing whether your score has gone up or down. If your bank doesn’t offer this service, you can request your credit score and how it was determined by asking one of the three main credit bureaus.
Equifax, Experian and TransUnion offer this service at AnnualCreditReport.com or by calling toll-free 1-877-322-8228. You can request this information yearly for free. Reports and information from these bureaus are completely free; they don’t try to sell you anything, whereas other companies offer to tell you your credit score and then may try to sell you on applying for a loan from their company (which may not be in your best interest).
It’s a good idea to request your free credit report each year, even if you don’t plan on buying a car. Look at every item on your report. Some items may not belong to you. Some items may have already been resolved, but are not showing up correctly. Some items you may have simply forgotten that you have like an old credit card account from a store where you used to shop.
Dispute any items that aren’t correct and clean up your report as best you can. This is definitely a good idea if you are in the process of a divorce or recently divorced as your credit report may reflect things from your former spouse.
What are FICO and Vantage Scores?
Fair Isaac Corporation (FICO) and VantageScore are basically the same as a credit score. Both agencies collect info from one of the three bureaus—Equifax, Experian and TransUnion. The main difference is FICO auto scores and VantageScore may weigh the unique aspects of your credit history differently.
In fact, Experian says FICO has industry filters, including for auto loans. This means that FICO weighs your previous auto loans more heavily than your credit cards or mortgage. Dealerships can choose whether to look at your FICO or VantageScore instead of your credit score. And unlike credit scores, which fall between 300-850, a specialty auto filter from FICO has a range of 250-900.
Sounds unfair, right? How do you know which scores your dealership is looking at? This is when shopping around for interest rates becomes important. What is your bank willing to lend you and at what interest rate? Check your credit union. Check other dealerships. Lower interest rates are going to save you a lot of money over the life of the loan.
What Do My Credit Score Numbers Mean?
Your credit score will be a three-digit number somewhere between 300-850. NerdWallet explains that a credit score between 720-850 is considered excellent. An excellent score will get you better interest rates on your car loan and may 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 wiggle room at the dealership. A score of 630-689 is considered fair credit, with anything below 629 being recognized as poor credit.
What Credit Score Do I Need to Finance a Car?
As you’ve probably guessed, the higher your credit score, the better finance rate you’re going to get at the dealership or bank. According to NerdWallet, a credit score of 661 or higher should get you an interest rate around 4.03% for purchasing a new vehicle. Compare that to someone with a credit score between 300-500 who will pay about 12.34% interest on the same purchase. It’s easy to see why a good credit score is important.
What about purchasing a used car? Interest rates are going to be higher no matter what your credit score is when purchasing 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 at about 5.53%. Get ready for the shocker: A poor credit score between 300-500 will pay an astronomical rate of around 20.43% for the same used car purchase. Yikes.
Numbers like that are scary and not knowing your credit score is scary, too. Are you clicking AnnualCreditReport.com or calling toll free 1-877-322-8228 to get your free credit score yet?
How Do I Raise My Credit Score?
There are some easy ways to raise your credit score. Start by correcting any misinformation. Forbes suggests always paying your bills on time and paying off debts. Take a look at your credit cards. Are they maxed out or do you have multiple cards with high balances compared 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’ll only want to be using $3,000 or less of that credit line.
Don’t Play Pretend at the Dealership
There’s no use in hiding what your credit score is when you’re on a car lot or shopping for loans at banks. They’re going to find out quickly. Your credit score is what it is. But as the saying goes, knowledge is power. If you’ve done your homework of getting your credit reports and cleaning them up as best as you can, take that information with you to show that you’re working on building better credit.
Bring in your cell phone bill, electric bill and even your mortgage or rent statements to show that you have been paying 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 that you’re able to pay for an auto loan. Dealerships and banks have some leeway. Show them you’re aware of your score and that your current efforts don’t 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’ll be offered on a new or used vehicle. It is worth your time to clean up your credit reports and shop around for interest rates before you head to the dealership. If you’re worried that your credit score isn’t good enough to get a decent interest rate, bring along evidence to show you’re working on improving your credit score.
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