As a first-time buyer, you might be confused about your credit score and what it has to do with the financing process! Let's take a look at credit basics, or everything you need to know before you start applying for auto loans.
Key Takeaways
- Your credit score, a number between 300 and 850, tells lenders how responsible you are when it comes to repaying your debts.
- You can improve your credit score in a number of ways. By improving your score, you can obtain a lower interest rate on your auto loan.
- It’s possible to finance a car with any credit score, no matter how low. However, a lower credit score may mean a higher interest rate, which would mean that you pay more in interest.
What’s a credit score and why does it matter?
A credit score is essentially a rating that tells lenders how likely you are to pay them back. FICO, the data company that issues your score, utilizes information from the three major credit agencies (Experian, Equifax, or TransUnion) to determine your creditworthiness.
Although FICO is somewhat secretive about how it comes up with each score, the data company does make the five main factors public:
- Payment History 35%
- Credit Utilization 30%
- Length of Credit History 15%
- Mix of Credit 10%
- New Credit 10%
Your actual score is a number between 300 and 850. Here’s a look at where each score stands:
- Bad: 300-549
- Poor: 550-649
- Fair: 650-699
- Good: 700-749
- Excellent: 750-850
How can you improve your credit score?
If time is on your side, there are a lot of things you can do to improve your credit score. While you don’t need a great credit score to obtain auto financing, a higher score will help lower your APR and allow you to pay less interest on your car loan.
Here are some things you can do to improve your FICO credit score:
- Get a copy of your credit report and check it for errors. Contact one of the major reporting agencies (Experian,Equifax,orTransUnion) to have any discrepancies removed.
- Keep your credit card balances low, or around 30 percent of the card’s credit limit. Because credit utilization is such a big part of your credit score, doing so should give your score a good boost.
- If you pay off any credit cards completely, keep the accounts open to help maintain a low credit utilization score.
- Pay your bills! Bills that are 30 days past due can have a negative effect on your score.
- Avoid opening any new credit cards for about six months before you begin the auto loan process.
What credit score do you need to finance a car?
You can finance a car with little to no credit! However, having a poor credit score may mean a higher interest rate. If you can repair your credit score before you apply for an auto loan, it’s worth doing.
To repair your credit, you should pay your bills on time, keep your credit card balances low, and avoid opening new lines of credit six months prior to applying for your car loan.