Cars are more expensive now than ever, with the average price of a new car nearing $50,000. So if you are like most people, you will probably need a loan if you are buying a new car. And while there are a lot of factors that affect whether or not you will be approved for a loan–and what APR you will be offered–nothing is more important than your credit score.
Here’s what credit score you should have when financing a car (and how you can raise your score if it’s not there yet).
What is a credit score?
Credit scores are used by lenders to determine how likely a person is to repay a loan. The number is calculated based on a number of financial metrics and ranges between 300–850. The higher the score, the more likely a person is deemed to pay back their loan.
Credit scores take the following aspects of your finances into account:
Payment history. This makes up 35% of your credit score. Do you make full, consistent, and on time payments?
Amounts owed. This makes up 30% of your credit score. How much money do you owe compared to how much credit you have available to you?
Length of credit history. This makes up 15% of your credit score. How long have you had your accounts open and in good standing?
Credit mix. This makes up 10% of your credit score. Can you manage payments across a healthy mix of accounts?
New credit. This makes up 10% of your credit score. Are there new accounts that the score is not taking into account?
The two most influential factors to your credit score are your payment history and the amount of debt you are in. If you do not have a history of making full, on time payments, or if you owe a lot of money compared to the amount of credit you have available to you, you will not have a great credit score.
While lenders of all types will look at your credit score to determine how likely you are to pay back a loan, car dealers have another score that they look at as well: your FICO Auto Score.
Your FICO Auto Score ranges from 250 to 900 and gives more weight to your automotive payment history. Past car loan payments, repossessions, and auto-loan bankruptcies are all taken into account much more. While some lenders use this, not all do, so be sure to ask what score the lender looks at more.
What is a good credit score for buying a car?
Credit scores are divided up into five categories:
Exceptional (Super prime): 781 to 850
Very Good (Prime): 661 to 780
Good (Non prime): 601 to 660
Fair (Subprime): 501 to 600
Poor (Deep subprime): 300 to 500
The higher your credit score is, the more likely you are to be approved for a car loan. Additionally, the higher your score is, the lower the car loan APR you are offered will be.
So what score do you need? According to Experian data released in August 2022, we know the following:
The average credit score for a used car loan or lease was 675
The average score for a new car loan or lease was 738
65% of borrowers had credit scores of 661 or higher (prime and super prime borrowers)
14% of borrowers had credit scores between 501 and 600 (subprime borrowers)
2% of borrowers had credit scores below 500 (deep subprime borrowers)
So while it’s not impossible to get financing with a less than great credit score, it is much easier to secure financing with a healthy credit score. On top of that, the Experian data shows that the better your credit score is, the lower the car loan APR you will be offered will be.
Superprime (781-850) average APR offered: 2.96%.
Prime (661-780) average APR offered: 4.03%.
Nonprime (601-660) average APR offered: 6.57%.
Subprime (501-600) average APR offered: 9.75%.
Deep subprime (300-500) average APR offered: 12.84%.
If your credit score is above 661, you will most likely be offered a drastically better APR than if your score is below that mark. But what does this mean in terms of actual money?
Let’s say you are taking out a loan for $20,000 and you have a credit score of 785. You are offered a car loan APR of 2.98% that you will pay over a period of four years. You will pay a total of $1,240.47 in interest over the life of the loan.
Now let’s say you are taking out that same $20,000 loan but your credit score is 620. You are offered a car loan APR of 7% that you will pay over a period of four years. In this case, you will pay a total of $2,988.39 in interest over the life of the loan. That’s a difference of nearly $1,800, with the only difference being the APR that you are offered.
Having a good credit score can save you a lot of money and put you in a much better financial situation. In addition to saving you money on your car loan, a good credit score can help you in other ways:
You are more likely to be offered lower interest rates on credit cards and loans
Lenders will be more likely to approve you
Landlords will approve you for rentals more easily
You will be approved for higher credit limits
You will get better insurance rates
You will have better negotiating power for loans and accounts
How can I improve my credit score?
If your credit score is less than perfect, there are a number of steps you can take to improve it. And with how much money you can save, it’s well worth the effort to improve it.
Check your credit report.
A good place to start is with your credit report. Request a copy of your report to see what is causing your score to drop. You can also look for any errors or mistakes that may be unfairly affecting your score. When you get your report, look for the following:
Compare payment histories (amounts and dates)
Look for accounts that you have not authorized or don’t recognize
Look for incorrect credit limits and balances
Make sure all of your personal data is correct
Inquiries that you have not authorized
Catching any errors or mistakes can help improve your score a great deal. Be sure to report anything irregular to the credit agency–they usually take about 30 days to respond. Even if you don’t notice any irregularities, checking your credit score can help you see what areas of your finances you need to work on.
Commit to on time payments.
Making full, on time payments is one of the best things you can do to help your credit score. Set reminders on your phone or try enrolling in autopay if you have an issue remembering to pay your bills.
Request higher credit limits.
One of the easiest ways you can boost your credit score is to request higher credit limits. Your credit utilization ratio looks at how much debt you have versus how much credit you have available to you and is an important factor of your score. By increasing the amount of credit you have at your disposal, you can shift this ratio and improve your score instantaneously.
Pay down debts.
Another way to improve your credit utilization ratio is to pay down your debts. Your credit utilization ratio looks at your overall debt to available credit ratio, but it also looks at the debt to available credit for each account. By focusing on paying down accounts that have a high credit utilization ratio, you can greatly help your score.
Avoid opening new accounts.
Credit inquiries on your report will trigger your score to decrease. While they do not impact your score in a huge way, every little bit counts when you are looking to take out a new loan and get a low APR. Even a temporary drop of 5 points can result in a higher APR. So try to avoid opening any new accounts or triggering any inquiries.
Having a credit score of 661 or above will help you secure a better car loan APR, and the higher your score is, the better off you will be.
If you already have a car loan, you may be wondering if this still applies to you. If your score has improved since your initial financing, did you just miss the boat on saving money?
The answer is no! Your improved credit score can help you refinance your current car loan and secure a lower car loan APR. By refinancing, not only can you get a better car loan APR, but you can change your repayment plan, add or remove a cosigner, and help reduce your monthly payments. So don’t wait to save money–get in touch with Auto Approve today to get a free quote!