If you're focused on buying a car, whether new or used, and you need to finance that purchase with an auto loan, then it's important to consider your credit score, since your score will largely determine the auto loan interest rate you're eligible for. Having a good credit score instead of a poor or even an average credit score can help you save a lot of money in the long run. So giving yourself enough time to build credit, if possible, before you buy a car can be smart.
About 90% of auto loan lenders use FICO's auto score, says credit expert Gerri Detweiler. FICO's auto scores range from 250 to 900 and look specifically at your creditworthiness for auto loans. When your score is calculated, the usual factors matter, like your payment history, whether or not your credit card balances have been increasing or decreasing, and your utilization rate, and there's also more weight put on your history with car-related debt specifically.
The higher your FICO auto score, the better your interest rate. The auto industry has its own lingo for the range of rate types: scores fall into five categories ranging from excellent credit (superprime) to bad credit (deep subprime). Subprime borrowers don't get access to the same kind of deals that superprime borrowers often get.
For the best, or superprime, rate, you will need what's considered excellent credit, but you don't need a perfect score: According to FICO, you'll typically qualify for the super-prime rate with an auto loan score of 720.
You can't get a look at your auto score for free, but you can buy a glimpse as part of FICO's subscription products. Or you can take advantage of free resources to check your regular FICO credit score, which traditionally ranges from 350 to 800: It's a good indicator of how auto lenders are likely to see you.
The number you need can vary by lender, though, says Detweiler. "It's important to note that FICO doesn't choose a cut-off score for various rates; lenders do," she says. "Lenders determine what rates to offer for various score ranges."
Let's say your FICO auto score is 700, putting you in the "good" range, according to FICO's calculator. The average new car loan amount for superprime drivers is $29,620, according to Experian, so you might qualify for the good (or prime) rate of 5.9% on a $29,620 loan paid over 60 months.
At a rate of 5.9%, your monthly payments will be $572 and you'll pay $4,649 in interest.
Now say your FICO auto score is 720 or above, qualifying you for the current best interest rate of 4.6%, on a new car, according to FICO's Loan Savings Calculator. Your monthly payments will dip to about $554, saving you $18 each month, and you'll pay $3,590 in interest over 60 months.
In other words, with a score of 720 instead of 700, you'd qualify for the superprime rate and pay $1,059 less in interest over the life of the loan.
Video by Stephen Parkhurst
Your interest rate will also change depending if the vehicle is new or used, says Ron Montoya, senior consumer advice editor at Edmunds. He says new car loans often have lower interest rates because automakers subsidize interest rates for finance firms as a motivation to sell more cars.
"When you look at used cars, it's more of a risk for a lender," he says. "You don't know what things may break down."
Car shoppers with higher credit scores tend to have more financing options available to them, like longer terms and better rates from multiple lenders, regardless if the car they purchase is new or used, says Melinda Zabritski, Experian's senior director of automotive financial solutions.
If you're shopping around to buy a car, Montoya suggests checking your credit score at least a few months beforehand. If your score needs improvement, then you'll have some time to try and bump it up in order to try to snag a better rate.
These steps can help:
- Pay all your bills on time. Paying your credit card late is the No. 1 reason credit scores drop. Late payments on rent, utilities, and other bills can also drag down your score. One solution: Set up automated payments to avoid having late payments and fees show up in your credit history, and to save yourself time.
- Next, keep an eye on your credit utilization rate. That's the ratio of how much you have spent on your credit card compared to how much you can spend, or your credit limit, and you want the ratio to be as low as possible, ideally below 30%. For example, if your credit limit is $5,000 and your balance is $500, that gives you a low utilization rate of only 10%. Your utilization score is a good indicator of how much of a risk you are to prospective lenders, and how likely it is that you'll pay back any money you borrow.
- Finally, if you can, pay off your credit card balance in full and on time each month. That helps you establish a solid payment and credit history.
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