A credit score is a cumulative number that quantifies the information in your credit reports into a single three-digit number, typically ranging from 300 to 850. It tells lenders, at a glance, how well you take care of your finances and manage debt, and it's important to know what a credit score is if you need to get a car loan.
When you're searching for financing, such as an auto loan, your credit score can determine your eligibility, interest rate, and other financing options, such as a down payment amount or loan term.
Basically, your credit score is an important part of vehicle financing. Here, we'll lay out what a credit score is, how it's calculated, and what you can do to build your score before taking on a car loan.
What is a Credit Score?
A credit score is a number between 300 and 850 that tells lenders, at a glance, how well you take care of your finances and manage debt – in other words, your creditworthiness.
The most common credit scoring models used today among lenders are typically FICO and VantageScore, which both use the same scale between 300 and 850. These are just the basic credit scoring models, though. There are more specific things lenders can look into, like your FICO Auto score, which specifically highlights how you've handled auto loans and leasing in your life.
How Credit Scores Work
Most credit scores range between 300 and 850, and where you land on that scale determines if you have good or bad credit, or something in between. A good credit score is usually seen as 670 or above.
FICO defines credit scores as:
- Poor (300 to 579)
- Fair (580 to 669)
- Good (670 to 739)
- Very Good (740 to 799)
- Exceptional (800 to 850)
How is a Credit Score Calculated?
A credit score is calculated by quantifying the information in your credit reports into a single number. Each of the five sections of your credit report is given a weight, and some are more important than others. The five factors that make up your credit score are:
- Payment History 35%: This tracks how good you are at paying your bills on time. More timely payments can increase your score.
- Credit Utilization 30%: Shows how much of your available credit is being used. The lower your credit utilization, the better your credit score.
- Length of Credit History 15%: How long have you been managing credit? The older it is, the better your credit score will be if the accounts are in good standing.
- Types of Credit Accounts 10%: Lenders like to see a mix of credit cards, loans, and mortgages, which shows a well-rounded financial life.
- Recent Credit Inquiries 10%: This shows any inquiries made by lenders, and the fewer you regularly have, the better.
If you want to know more about checking your FICO score, there are several ways you can, including through your bank, a credit union, your credit cards, or through a credit bureau such as Experian.
Why Your Credit Score Matters for Auto Loans
The higher your credit score, the better the information in your credit report, and the more likely you are to be offered a loan or line of credit. Additionally, the better your credit score, the lower your interest rate is likely to be.
When it comes to getting an auto loan, your credit score matters to the lenders you're trying to work with. So, the first thing any lender will do is to look at your credit score. If your score is within the range they can work with (each lender has its own range), they will then pull up a copy of your credit reports.
If your credit score is too low right off the bat, they may not even take the second step, and you may be turned down based on your credit score alone.
If you have a lower credit score, but the lender is willing to work with you, they typically pull your credit reports to get the story behind your low score. Usually, this happens at subprime dealerships, where a special finance lender can work with people with unique credit situations.
When you do get the opportunity for a car loan with a low credit score, you're more likely to face higher interest rates, typically around 13% or higher, and you may not be able to get a short-term loan due to the higher costs associated with poor credit.
Since good credit is usually considered 670 or better, anyone with a lower score should pay attention to the type of dealer they're using for their loan. Subprime lenders are more likely to work with consumers who have lower credit scores, but some captive lenders, such as Kia and Hyundai dealers, are known for working with borrowers who have poor credit.
Improving Your Credit Score for Better Auto Financing
When it comes to getting auto financing, it's important to stay on top of your finances and credit. The better your credit score is, the more favorable your terms and conditions are likely to be on a car loan.
If your credit isn't in the ideal place to take on an auto loan right now, there are some things you can do to build your credit score for future financing opportunities.
The number one thing you can do is to pay all your existing bills on time and in full, including all loans and credit card balances. Staying on top of your credit history by having a record full of timely payments is the best way to improve your credit over time.
Other advice for improving your credit score includes:
- Keeping credit cards open: If you already have a credit card, you can make it work for you by keeping it paid off and open. The longer your credit history, the better off you are. Each time you close an old credit card that you don't use anymore, you're taking information off your credit report that may be helping you.
- Opening a secure credit card: A secure credit card is one that starts with a minimum deposit, typically between $200 to $500. The deposit becomes the balance, and you use it and pay it off like a normal credit card. This allows you to build a solid payment history when you may not have decent enough credit to open a traditional credit card.
- Keep credit inquiries to a minimum: Too many inquiries that don't result in credit can only serve to lower your score. Only apply for credit when it's necessary, and if you're looking for the best rates on something like a car loan or a home mortgage, make sure to keep your inquiries close together in a rate shopping window so that there is minimal impact on your credit score.
- Become an authorized user on someone's credit card: An authorized user gets all the benefits of a credit card, but isn't responsible for the bill. This can be a boon if you're trying to build credit. If you do this, ensure the person you're signing up with stays on top of their payments; otherwise, the credit card will only hurt your credit score instead of helping.
- Have your current payments reported to the credit bureaus: Using a service such as Experian Boost to have your current recurring payments added to your credit report can bump up your score. You can also see if things like your rent payments can be added to your credit report.
- Take out a credit builder loan: A credit builder loan is a loan specifically designed to help a person with lower credit scores build their credit. These loans are often available through banks and credit unions and can help you build a positive payment history.
Keep in mind that building credit takes time; you won't see any instant growth in your credit score for at least 30 to 90 days after positive activity has happened, since it sometimes takes a little while for companies to begin reporting your positive payments.
It's very important to stay on top of your credit by knowing your credit score and checking your credit reports frequently. This is easy to do since you can get a free weekly copy of your credit reports from each of the three national credit bureaus, TransUnion, Experian, and Equifax, by visiting AnnualCreditReport.com. This is a government-sponsored website that makes it easy to keep tabs on your credit throughout the year.
This is especially true if you're trying to improve your credit for a car loan.
