What credit score is used to buy a car?

Buying a car is a significant financial decision for most people. While many focus on the car's make, model, and features, a crucial aspect often overlooked is your credit score. Your credit score plays a pivotal role in determining whether you'll be approved for an auto loan and, more importantly, the interest rate you'll pay. This guide provides a comprehensive overview of what credit score is used to buy a car, helping you navigate the auto financing process with confidence.

Understanding the Importance of Your Credit Score in Auto Financing

Your credit score is a three-digit number that represents your creditworthiness. It reflects your history of borrowing and repaying debt. Lenders use this score to assess the risk of lending you money. A higher credit score indicates a lower risk, making you more likely to be approved for a loan with favorable terms. Conversely, a lower credit score signals a higher risk, potentially leading to loan rejection or higher interest rates.

How Credit Scores Impact Auto Loan Interest Rates

The interest rate you receive on your auto loan directly impacts the total cost of your vehicle. Even a seemingly small difference in interest rates can result in significant savings (or expenses) over the loan's lifetime. Borrowers with excellent credit scores typically qualify for the lowest interest rates, while those with poor credit scores often face the highest rates. This is because lenders view borrowers with low credit as riskier and charge them more to offset that risk.

For example, let's say you're financing a $20,000 car over five years:

• Excellent Credit (750+): You might qualify for a 4% interest rate. This results in a monthly payment of approximately $368 and total interest paid of around $2,080.
• Poor Credit (Below 600): You might face an interest rate of 12%. This translates to a monthly payment of approximately $445 and total interest paid of around $6,700.

As you can see, the difference in total interest paid is substantial, highlighting the importance of having a good credit score before applying for an auto loan.

What Credit Score is Generally Needed to Buy a Car?

While there's no single "magic number," different credit score ranges can significantly influence your auto loan options. Here's a breakdown of credit score tiers and their typical impact on car loan terms:

• Super Prime (781-850): This is the highest credit tier, and borrowers in this range are virtually guaranteed the best interest rates and loan terms.
• Prime (661-780): Borrowers with prime credit scores can also expect favorable interest rates, although they may not be quite as low as those offered to super prime borrowers.
• Near Prime (601-660): Borrowers in this range may still be approved for auto loans, but they'll likely face higher interest rates than those with prime or super prime credit.
• Subprime (501-600): Auto loans are still possible with subprime credit, but interest rates will be significantly higher. Be prepared to shop around and compare offers carefully.
• Deep Subprime (300-500): Securing an auto loan with a deep subprime credit score is challenging, and interest rates will be very high. It's often advisable to focus on improving your credit score before applying for a loan.

The FICO Auto Score: A Key Consideration

While lenders consider your overall credit score, many also use a specific type of FICO score called the FICO Auto Score. This score is tailored to the auto lending industry and takes into account factors that are particularly relevant to predicting auto loan repayment behavior. It's based on your credit report data, but it weighs different factors more heavily than a general FICO score. For instance, it might place more emphasis on your history of making timely payments on previous auto loans or other secured debts.

Different versions of the FICO Auto Score exist (e.g., FICO Auto Score 2, 5, 8, and 9). The version used can vary by lender. Understanding that lenders may be looking at this specific score is important, as it can differ from the general FICO score you might check yourself.

Factors Affecting Your Auto Loan Credit Approval

While your credit score is a primary factor, lenders also consider other aspects of your financial profile when evaluating your auto loan application. These include:

• Income: Lenders want to ensure you have sufficient income to comfortably make your monthly loan payments. They'll typically ask for proof of income, such as pay stubs or tax returns.
• Debt-to-Income Ratio (DTI): Your DTI is the percentage of your gross monthly income that goes towards debt payments. Lenders prefer a lower DTI, as it indicates you have more financial flexibility.
• Loan-to-Value Ratio (LTV): The LTV compares the loan amount to the value of the vehicle. A lower LTV (i.e., a larger down payment) reduces the lender's risk.
• Employment History: Lenders prefer borrowers with a stable employment history, as it suggests a consistent income stream.
• Down Payment: A larger down payment can increase your chances of approval and potentially lower your interest rate. It demonstrates your commitment to the loan and reduces the lender's risk.
• The Vehicle Itself: Lenders will assess the value and age of the vehicle you are purchasing. Older cars or cars with higher mileage may present a higher risk of breakdown and therefore, may be harder to finance or lead to higher interest rates.

Tips for Improving Your Credit Score Before Buying a Car

If your credit score isn't where you want it to be, don't despair! There are several steps you can take to improve it before applying for an auto loan. Here are some effective strategies:

1. Check Your Credit Report: Obtain a copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) and carefully review them for any errors or inaccuracies. Dispute any errors you find, as they can negatively impact your credit score. You can obtain a free copy of your credit report annually from AnnualCreditReport.com.
2. Pay Bills on Time: Payment history is the most important factor in determining your credit score. Make sure to pay all your bills on time, every time. Consider setting up automatic payments to avoid missing deadlines.
3. Reduce Credit Card Balances: High credit card balances can negatively affect your credit utilization ratio, which is the amount of credit you're using compared to your total available credit. Aim to keep your credit card balances below 30% of your credit limit.
4. Avoid Opening Too Many New Accounts: Opening multiple new credit accounts in a short period can lower your average account age and negatively impact your credit score.
5. Become an Authorized User: If you have a friend or family member with good credit, ask them to add you as an authorized user on their credit card. This can help boost your credit score, as the account's positive payment history will be reflected on your credit report.
6. Consider a Secured Credit Card: If you have limited or no credit history, a secured credit card can be a good way to build credit. With a secured card, you provide a security deposit, which serves as your credit limit. By making timely payments, you can establish a positive credit history.

What If You Have Bad Credit? Options for Car Financing

Even with a low credit score, it's still possible to obtain an auto loan. However, be prepared to face higher interest rates and less favorable loan terms. Here are some options to consider:

• Shop Around and Compare Offers: Don't settle for the first loan offer you receive. Shop around and compare offers from multiple lenders, including banks, credit unions, and online lenders.
• Make a Larger Down Payment: A larger down payment can reduce the lender's risk and potentially lower your interest rate.
• Consider a Co-Signer: A co-signer with good credit can increase your chances of approval and help you secure a lower interest rate.
• Focus on Used Cars: Used cars are typically less expensive than new cars, which means you'll need to borrow less money. This can make it easier to get approved for a loan.
• Improve Your Credit Profile: While needing a car immediately may not allow for this, if possible, delay your purchase and take steps to improve your credit. Even a small improvement can lead to better loan terms.
• Dealerships Specializing in Bad Credit: Some dealerships specialize in working with customers who have bad credit. These dealerships often have relationships with lenders who are willing to take on more risk. However, be cautious and carefully review the loan terms, as interest rates and fees can be very high. These "buy here, pay here" lots should be a last resort.

The Impact of Leasing on Your Credit Score

Leasing a car is another option to consider. While leasing doesn't involve taking out a traditional loan, your credit score still plays a role in determining whether you'll be approved for a lease and the lease terms you'll receive. Generally, leasing requires a higher credit score than buying a car with a loan. Lenders still assess your creditworthiness to determine the residual value and lease rate (essentially the interest rate for a lease). Poor credit will still result in higher monthly lease payments and potentially require a larger down payment or security deposit.

The Importance of Checking Your Credit Before Visiting a Dealership

Before heading to a car dealership, it's wise to check your credit score and obtain a copy of your credit report. This will give you a clear understanding of your creditworthiness and help you anticipate the interest rates and loan terms you're likely to receive. Knowing your credit score empowers you to negotiate more effectively and avoid being taken advantage of by unscrupulous dealers.

You can check your credit score for free through various online services or through your credit card issuer. Be sure to understand which scoring model is being used (FICO or VantageScore) as this may differ from the FICO Auto Score that lenders use.