What FICO score do car dealers use?

Buying a car often involves securing an auto loan, and your FICO score plays a crucial role in the loan approval process and the interest rate you'll receive. However, it's not as simple as checking your general FICO score. Car dealers typically use a specific version of the FICO score designed for auto lending. This guide will delve into which FICO score car dealers use, how it affects your loan terms, and what you can do to improve your chances of getting a favorable rate.

Understanding FICO Scores

Before diving into the specific FICO score used by car dealers, let's briefly review what a FICO score is and why it matters.

A FICO score is a three-digit number that represents your creditworthiness. It's calculated based on information in your credit reports, which are maintained by the three major credit bureaus: Experian, Equifax, and TransUnion. Lenders use FICO scores to assess the risk of lending money to you. A higher FICO score generally indicates a lower risk, making you more likely to be approved for a loan with better terms.

The FICO scoring system considers various factors, including:

• Payment history (35%): Whether you pay your bills on time.
• Amounts owed (30%): The amount of debt you have relative to your available credit.
• Length of credit history (15%): How long you've had credit accounts.
• Credit mix (10%): The variety of credit accounts you have (e.g., credit cards, installment loans).
• New credit (10%): How recently you've opened new credit accounts.

The Specific FICO Auto Scores: 2, 4, and 5

While your general FICO score is a good indicator of your overall credit health, car dealers don't typically rely on it for auto loan decisions. Instead, they use specialized FICO Auto Scores, specifically FICO Auto Score 2, FICO Auto Score 4, and FICO Auto Score 5. These scores are versions of the FICO score that are tailored to predict the likelihood of default on an auto loan.

Here's a breakdown of which bureau and FICO version is often used:

• Experian: Often uses FICO Auto Score 2.
• Equifax: Often uses FICO Auto Score 5.
• TransUnion: Often uses FICO Auto Score 4.

It's important to note that the exact FICO version used can vary depending on the lender and the state you live in. Some lenders might use only one credit bureau, while others might pull reports from all three. Because of this variation, it's crucial to understand how these specialized scores differ from your regular FICO score.

Why Use Auto-Specific FICO Scores?

Auto-specific FICO scores are designed to provide a more accurate assessment of your risk as an auto loan borrower. These scores consider factors that are particularly relevant to auto loans, such as your history of making payments on previous auto loans and your overall credit behavior in relation to vehicle financing. These specialized scores can provide a more nuanced view of your creditworthiness for the specific purpose of an auto loan.

How Auto FICO Scores Differ from Standard FICO Scores

While based on the same underlying credit data, Auto FICO scores may weigh certain factors differently than standard FICO scores. For example, a history of late payments on auto loans might have a more significant negative impact on your Auto FICO score compared to your standard FICO score. Similarly, having a long history of successfully managing auto loans could positively influence your Auto FICO score.

Another difference can arise from the fact that Auto FICO scores are often based on older versions of the FICO algorithm. While the standard FICO score is frequently updated with the latest data and methodologies, some lenders still rely on older versions of the FICO Auto Scores. This means your Auto FICO score might not perfectly align with your more recent standard FICO score.

Impact of Your FICO Auto Score on Auto Loan Terms

Your FICO Auto Score has a significant impact on the terms of your auto loan, including:

• Loan Approval: A higher FICO Auto Score increases your chances of being approved for an auto loan. Lenders are more likely to approve applicants with strong credit histories.
• Interest Rate: The interest rate you receive on your auto loan is directly correlated to your FICO Auto Score. A higher score typically translates to a lower interest rate, saving you money over the life of the loan.
• Loan Amount: Lenders may be willing to offer a larger loan amount to borrowers with higher FICO Auto Scores, as they are seen as less risky.
• Down Payment Requirements: A strong FICO Auto Score may allow you to put down a smaller down payment, or even no down payment at all, depending on the lender.

In essence, a better FICO Auto Score gives you more leverage and flexibility when negotiating the terms of your auto loan.

FICO Auto Score Ranges and What They Mean

FICO Auto Scores, like standard FICO scores, generally range from 300 to 850. However, the specific ranges and their associated risk levels can vary slightly depending on the version of the Auto FICO score used. Here's a general guideline:

• 800-850: Excellent. You'll likely qualify for the best interest rates and loan terms.
• 740-799: Good. You're likely to receive favorable interest rates and loan terms.
• 670-739: Fair. Interest rates may be higher, and you might have fewer loan options.
• 580-669: Poor. You may face higher interest rates, stricter loan terms, and potentially require a larger down payment.
• 300-579: Very Poor. Securing an auto loan can be challenging, and if approved, you'll likely face very high interest rates and restrictive terms. Consider focusing on improving your credit before applying for a loan.

Remember that these ranges are approximate, and the specific cutoffs used by lenders may vary. It's always a good idea to check your own FICO Auto Scores to get a more accurate understanding of your creditworthiness.

How to Check Your FICO Auto Score

Checking your FICO Auto Score requires a bit more effort than checking your standard FICO score. While some credit monitoring services provide access to various FICO scores, including industry-specific versions, it's essential to confirm that the service you're using specifically provides the FICO Auto Scores (2, 4, and 5) that car dealers use.

Here are a few ways to check your FICO Auto Score:

• Experian: Experian offers a service that allows you to view your FICO Auto Score 2, along with other credit information.
• myFICO: myFICO, the official website for FICO scores, offers subscription plans that provide access to various FICO scores, including Auto Scores. Check their plan details to ensure it includes the specific Auto Scores you need.
• Directly from the Credit Bureaus: You can purchase your credit reports and FICO Auto Scores directly from Experian, Equifax, and TransUnion.
• Some Credit Monitoring Services: Certain credit monitoring services may offer access to FICO Auto Scores. Review the service details carefully before subscribing.

Tips to Improve Your FICO Auto Score Before Applying for an Auto Loan

Improving your FICO Auto Score takes time and effort, but it's well worth it if you want to secure a better auto loan. Here are some strategies to consider:

• Pay Your Bills on Time: Payment history is the most important factor in your FICO score. Set up automatic payments or reminders to ensure you never miss a due date.
• Reduce Your Credit Card Balances: Aim to keep your credit card balances well below your credit limits. A credit utilization ratio (the amount of credit you're using compared to your total available credit) below 30% is generally recommended.
• Avoid Opening New Credit Accounts: Opening multiple new credit accounts in a short period can lower your credit score. Only apply for new credit when you truly need it.
• Correct Errors on Your Credit Reports: Regularly review your credit reports from all three major credit bureaus. If you find any errors, dispute them with the credit bureau immediately.
• Become an Authorized User: If you have a trusted friend or family member with a credit card and a strong credit history, ask to become an authorized user on their account. Their positive credit behavior can help improve your own credit score.
• Don't Close Old Credit Accounts: Keeping older, established credit accounts open, even if you don't use them regularly, can help improve your credit history length.
• Consider a Secured Credit Card: If you have limited or poor credit history, a secured credit card can be a good way to build or rebuild your credit.

Preparing for Your Auto Loan Application

In addition to improving your FICO Auto Score, there are other steps you can take to prepare for your auto loan application:

• Determine Your Budget: Figure out how much you can realistically afford to spend on a car each month, considering factors like car payments, insurance, gas, and maintenance.
• Shop Around for the Best Rates: Don't settle for the first loan offer you receive. Get quotes from multiple lenders, including banks, credit unions, and online lenders.
• Get Pre-Approved: Getting pre-approved for an auto loan can give you a better understanding of how much you can borrow and what interest rate you'll likely receive. It also puts you in a stronger negotiating position at the dealership.
• Research Different Car Models: Before heading to the dealership, research different car models that fit your needs and budget. This will help you avoid impulse purchases and make a more informed decision.
• Be Prepared to Negotiate: Don't be afraid to negotiate the price of the car and the terms of the loan. Remember that the dealer's initial offer is often not the best deal you can get.

Understanding Different Auto Loan Options

There are various types of auto loans available, each with its own pros and cons. Some common types include:

• New Car Loans: These loans are used to finance the purchase of a brand new vehicle. They typically come with lower interest rates than used car loans.
• Used Car Loans: These loans are used to finance the purchase of a used vehicle. Interest rates are generally higher than new car loans due to the increased risk.
• Refinancing Auto Loans: If you already have an auto loan, you may be able to refinance it at a lower interest rate, potentially saving you money over the life of the loan.
• Leasing: Leasing a car is an alternative to buying. You make monthly payments to use the car for a set period of time, and then you return it to the dealership at the end of the lease term.

It's essential to carefully consider your options and choose the type of auto loan that best fits your financial situation and needs.