What Credit Score Do I Need To Buy a Car?
Suppose Person A and Person Z are both shopping for used cars. They each have $2,000 to spend, and they want to pay off their loans in three years. They settle on the same $10,000 model, and the dealership happens to have two identical vehicles. The only difference between these two people is their credit scores. Person A’s score is 750, while Person Z’s score is 620. Person A can secure a loan with a 5% interest rate because of that 750 score, while Person Z can only get financing at an 8.5% interest rate. Person Z will end up paying more than Person A over the three years of the loan. The difference would be even greater on a larger loan. U.S. News & World Report broke down average auto loan interest rates for new and used cars by credit score as of February 2022. People with very bad credit, sometimes referred to as deep subprime borrowers, can find it very hard to be approved for a car loan. A number of factors go into calculating a credit score. The major considerations are your payment history, the amount you owe compared to your credit limits, how long you’ve been using credit, how many new credit accounts you have, and your credit mix (the different types of loans you have). You can check with the credit bureaus or use a third-party provider like Credit Karma or Credit Sesame to find out your score. Many banks and credit card companies will give you access to your credit score as well at no charge.
How Can I Improve My Credit Score?
You’re likely to improve your score if you follow some simple guidelines.
Pay Your Loans on Time Every Month
Make at least the minimum payments on all your credit card loans every month, and don’t be late. One of the biggest factors in your credit score is your history of paying on time.
Don’t Use More Than 30% of Your Available Credit
It’s a sign to lenders that you’re strapped for cash if you’re maxing out your credit cards. Try to keep your outstanding balances on loans to below 30% of your overall credit limit by paying down your debts.
Keep Credit Card Accounts Open
Don’t close old credit cards. It’s still a good idea to keep them even if you’re not using them. Closing old accounts can hurt your score by shortening your average account age and by reducing your overall credit limit of all your cards combined. Deal with a car loan first before you consider financing anything else if you’re ready to buy a car. It’s also best to do your rate shopping relatively quickly so that it doesn’t look like you’re applying for a bunch of new loans. FICO considers multiple inquiries of the same type to be just one inquiry if they all occur in a “typical shopping period.” This indicates that you’re shopping for the best deal on a specific type of loan. You don’t want to stretch your activity out beyond this point. Remember that you have to be able to afford your monthly payments, no matter how tempting it may be to go with a fancier, more expensive car. Being late or overdue on any payments will only hurt your credit score and your chances of better loan rates in the future.
