Do dealerships look at FICO score 8?

Securing an auto loan can be a significant step towards owning the car you need. A crucial part of the process involves the dealership checking your creditworthiness. But which credit score do they use? Specifically, is FICO Score 8 a factor in their decision? Let's delve into the world of auto loan credit checks and uncover the truth.

Understanding FICO Scores

FICO scores, developed by the Fair Isaac Corporation, are the most widely used credit scoring models in the United States. They range from 300 to 850, with higher scores indicating better creditworthiness. Your FICO score is a key factor lenders consider when evaluating your loan application. A good FICO score can lead to better interest rates and loan terms, while a poor score might result in higher rates or even loan denial.

It's important to understand that there isn't just one FICO score. FICO has created numerous versions, and lenders can choose which ones they prefer to use. These versions are updated periodically to better predict risk based on evolving consumer behavior and economic conditions.

Different FICO Score Versions

Over the years, FICO has released several versions of its scoring model. Here are a few key versions to be aware of:

• FICO Score 8: This is one of the most commonly used versions of the FICO score, and for many years was the prevailing model. It places a greater emphasis on recent credit activity and payment history.
• FICO Auto Score: These are industry-specific scores designed specifically for auto lending. They are more predictive of auto loan repayment than general-purpose FICO scores. FICO Auto Scores also have different versions (e.g., FICO Auto Score 2, FICO Auto Score 5, FICO Auto Score 8, FICO Auto Score 9).
• FICO Score 9: This more recent version treats medical debt differently and gives less weight to paid collection accounts.
• VantageScore: Developed by the three major credit bureaus (Equifax, Experian, and TransUnion), VantageScore is another widely used credit scoring model. While not a FICO score, it's important to know it exists, as some lenders might use it. Like FICO scores, VantageScore also has several versions.

Do Dealerships Use FICO Score 8 for Auto Loans?

The simple answer is: it's possible, but not always. While FICO Score 8 was once a widely adopted model, the auto lending industry has increasingly moved towards using more recent, industry-specific scores, particularly the FICO Auto Score versions. However, some dealerships may still use FICO Score 8, especially smaller dealerships or those with older credit systems.

Here's a more detailed breakdown:

• FICO Auto Scores are Preferred: Many lenders specializing in auto loans utilize FICO Auto Scores because these scores are designed to be more predictive of how likely you are to repay an auto loan. They consider factors specific to auto loan repayment, giving lenders a more accurate assessment of risk.
• Older Dealerships Might Still Use FICO 8: Some smaller or less technologically advanced dealerships might still rely on FICO Score 8, particularly if they haven't updated their credit scoring systems recently.
• Variety Among Lenders: Keep in mind that dealerships often work with multiple lenders. Each lender may have its own preferred FICO score version or even use VantageScore. This means that different lenders evaluating the same loan application might be looking at slightly different credit information.

Why FICO Auto Scores are Favored

FICO Auto Scores are designed to better predict auto loan performance by incorporating elements specific to the auto lending market. This allows lenders to:

• Assess Risk More Accurately: FICO Auto Scores provide a more granular assessment of risk related to auto loan repayment.
• Make More Informed Lending Decisions: These scores help lenders make better decisions about loan approval, interest rates, and loan terms.
• Potentially Offer Better Rates: By having a clearer picture of risk, lenders can sometimes offer more competitive interest rates to borrowers with strong FICO Auto Scores.

How Dealerships Check Your Credit

When you apply for an auto loan at a dealership, they will typically check your credit report from all three major credit bureaus: Equifax, Experian, and TransUnion. This process involves a "hard inquiry" on your credit report, which can slightly lower your credit score (usually by only a few points).

Here's what the dealership will look for in your credit report:

• Credit Score: The primary factor is your credit score. A higher score indicates a lower risk of default.
• Credit History: They will examine your credit history to see how you've managed credit in the past. This includes your payment history, outstanding debt, types of credit accounts, and the age of your credit accounts.
• Debt-to-Income Ratio (DTI): While not directly from your credit report, the dealership will calculate your DTI by comparing your monthly debt obligations to your gross monthly income. A lower DTI is generally preferred.

The Impact of Multiple Credit Inquiries

It's important to note that multiple hard inquiries within a short period (typically 14-45 days) for the same type of loan (like an auto loan) are generally treated as a single inquiry. This is because credit scoring models recognize that you're shopping around for the best rates. However, spreading out your loan applications over a longer period can negatively impact your credit score.

What You Can Do to Improve Your Chances of Auto Loan Approval

Whether the dealership uses FICO Score 8 or another credit scoring model, improving your credit health is always beneficial. Here are some steps you can take:

1. Check Your Credit Report: Obtain a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) at AnnualCreditReport.com. Review it carefully for any errors or inaccuracies. Dispute any errors you find.
2. Pay Your Bills on Time: Payment history is the most significant factor in your credit score. Make sure to pay all your bills on time, every time.
3. Lower Your Credit Utilization: Credit utilization is the amount of credit you're using compared to your total available credit. Aim to keep your credit utilization below 30% on each credit card.
4. Reduce Your Debt: Paying down your existing debt can improve your credit score and lower your debt-to-income ratio.
5. Avoid Opening Too Many New Accounts: Opening several new credit accounts in a short period can negatively impact your credit score.
6. Consider a Co-signer: If you have a weak credit history, consider asking a creditworthy friend or family member to co-sign your auto loan.
7. Get Pre-Approved: Getting pre-approved for an auto loan from a bank or credit union can give you a better understanding of your interest rate and loan terms before you visit the dealership. This also puts you in a stronger negotiating position.

Alternatives if You Have Poor Credit

If you have poor credit, securing an auto loan can be challenging. However, there are still options available:

• Credit Unions: Credit unions often offer more favorable loan terms to their members, even those with less-than-perfect credit.
• Special Finance Dealerships: Some dealerships specialize in working with borrowers who have bad credit. However, be prepared to pay higher interest rates and fees.
• Secured Auto Loans: A secured auto loan requires you to put up collateral, such as a savings account or other asset. This can help you get approved if you have poor credit.
• Focus on Saving for a Larger Down Payment: A larger down payment reduces the amount you need to borrow, which can make you a less risky borrower and potentially increase your chances of approval.