Whats A Good Credit Score To Buy A Car
While there is no specific minimum credit score to buy a car, your credit rating is an important factor in the financing approval process and determining your interest rate. In fact, according to FICO, most auto lenders use what's called a FICO Auto Score as part of their lending decision.
whats a good credit score to buy a car
If you are wondering, "What is a good credit score to buy a car?" you have come to the right place. Your credit score matters a lot when buying a car. Let's take a look at what you need to know about credit history and auto financing.
According to Experian data in the second quarter of 2021, the lowest auto loan rates are reserved for people with a higher credit score above 780 (also known as a prime credit score). Borrowers with a subprime credit score below 500 have difficulty getting approved for car financing.
These borrowers may struggle to qualify for a car loan. If you do qualify, you can count on paying the highest interest rates. Borrowers with very poor credit scores typically have many late or missed payments, bankruptcies, or other serious negative information on their credit report. Borrowers in this range would pay around 14.4% for a car loan, according to Experian.
Very good credit scores are typically reserved for borrowers with a history of on-time payments and low credit balances. These borrowers typically have multiple credit accounts and a history showing they can manage multiple accounts with on-time payments and get close to the best interest rates available.
If you are worried about being subprime and getting approved or just want to save money with a lower interest rate, you can take action today to improve your credit score. First step? Check your credit report from the credit reporting agencies (you can get a free copy every 12 months from each bureau at annualcreditreport.com) to see where you stand and how you can improve your credit rating.
Nearly everyone can qualify for a car loan and buy a car, no matter their credit score. However, the lower the score you have, the more expensive buying a car will be. Buyers with extremely low scores can easily find themselves falling prey to predatory lenders, and will need to consider whether having a car is worth the high price of its financing.
To get an auto loan without a high interest rate, our research shows you'll want a credit score of 700 or above on the 300- to 850-point scale. That's considered prime credit, and lenders don't have to price much risk into their rates.
The absolute best auto loan interest rates are reserved for borrowers with scores of 750 or higher. These super prime borrowers represent little risk to lenders. They almost always make their payments on time, and they pay their financing off as agreed in their loan documents. Of course, bad things happen to even the best borrowers, so lenders price some risk into the interest payment.
To qualify for these money-saving offers, you need to have a top-notch credit score. That means that even a score of 750 may not be eligible. Car deals are another reason you want to check your credit scores and the credit history behind them well before you're in the market for a new car. A difference of just a few points may be the difference between getting a car deal that saves you thousands of dollars and missing out on the offer altogether.
As we mentioned earlier, credit scores are based on the information in your credit reports. They include information about your payment history, how much credit you have available, how much debt you have relative to the amount that is available to you. Each model is slightly different, and many are proprietary, but here's an example of the components and weight using publicly available information about the FICO scoring model.
In addition to the amount of credit you have, your credit score also reflects the amount of time you have honored your debt payment commitments. The longer you have responsibly managed credit, the higher your score will be.
There are several things you'll find on a credit report that don't affect your credit score. Factors like where you live, your occupation, some types of credit inquiries, and your salary are not included. Of course, your lender will ask for your salary on any loan application so that they can determine your debt-to-income ratio. That ratio is another critical factor lenders consider when making car loan decisions.
While some of it may appear on your report, demographic information, such as age, race, gender, or marital status is not used in determining your score. It is not legal for a credit reporting agency to consider whether you receive public assistance when assigning a rating.
In general, information about utility, cable, or cell phone bills does not count for or against your score, though opting for the Experian Boost product mentioned in an earlier section can bring those payments into the mix.
Deep Subprime (300-500): Car buyers in the lowest credit tier will find it difficult to get a car loan. If they can get one, they'll pay extremely high interest rates. Having a score in this range tells lenders there is considerable risk in extending financing, and there's a good chance the loan will not be repaid.
When you have prime credit, you'll likely be inundated with credit card offers in your mailbox and email. While the temptation to get more credit can be strong, it's smart to be careful. Applying for credit cards will cause a "hard pull" of a credit report, which lowers your score by a few points. Adding additional amounts of credit will also lower your score, especially if you go on a shopping spree and carry balances on your new cards.
Super Prime (781-850): Shoppers with a credit score that is considered super prime have access to the lowest interest rates, most generous auto loan terms, and special low-interest financing deals offered by automakers. According to Experian, they earn interest rates that are about 1% lower than even prime borrowers, and tend to have lower car payments than borrowers in any other credit class.
To put it simply, the higher your credit score, the lower your interest rate will be, and the less restrictive the loan terms will be. Having a high credit score can save you thousands of dollars on the total cost of your financing. Because of the more generous loan terms offered, borrowers with high credit scores will generally have less chance of owing more on their cars than the vehicle is worth.
The same buyer with a credit score in the nonprime category could expect an average interest rate of 7.77%, which would give them a monthly payment of $544, according to our auto loan calculator. They would pay a total of $5,670 over the term of the loan. The total cost of their car would be $35,670.
Each year you are entitled to view your credit reports (not scores) from each of the three major credit bureaus for free, with no strings attached. The only site authorized to provide them is AnnualCreditReport.com. Beware of similarly sounding sites that will charge you to access your reports. The full credit reports you receive from annualcreditreport.com will not include your credit score, though they will offer to provide it for an additional fee. Fortunately, there are many other places to access it for free, so you can avoid the extra charge.
While you can destroy your credit score in a matter of months, improving it takes time and patience. Despite advertisements that promise to improve your score in an instant (for a fee), doing it the right way is a long process. That's one reason it's critical to check your credit scores well before you consider buying a new ride.
A better idea is to pay as much as you can toward your credit card and other debt balances each month. Doing so lowers both the amount of debt reported to the credit bureaus and your utilization of credit. Start by paying the extra on your highest interest rate debt first. That makes the biggest dent by attacking the principal balance. When that card is paid off, start working down the balance on the account with the next-highest interest rate. It might mean making sacrifices other places in your life, but building your credit score will save you money in the long run.
Even if you don't want to make major purchases on credit cards, there are a couple of easy ways to use them that won't build a huge balance. Using a credit card for recurring monthly payments, such as streaming services, will help you build your credit score without too much financial risk. Using a credit card for gas purchases has the side benefit of allowing you to easily track how much you're spending.
Make a Plan: Meeting a goal is easier when you have a plan. When you create a budget, you can track your income and expenses. That helps identify places where you can save money. It's essential to include an emergency fund in your planning. Unexpected expenses are a significant cause of financial upset, and can drive even responsible consumers to have lousy credit scores.
A better idea is to put together a systematic plan to fix the problems with your credit. The first step is studying your credit reports and determining the easiest issues to attack, as well as those changes that will have the biggest impact on your score.
Interest rates and loan terms aren't the only things affected by your credit score. In most states, auto insurers can also consider your credit history when determining your premiums. The practice is legal because auto insurance companies can show a correlation between credit scores and claim rates.
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