Rather than asking, "What credit score do you need to buy a car?" it's a better idea to ask, "What credit score do you need to get a good deal on an auto loan?"
It’s always in a dealership’s advantage to sell you a car, so the salespeople are going to do everything to secure financing for you, even if your credit isn’t stellar—albeit sometimes at ridiculous interest rates.
Typically, a credit score of 700 or higher will put you in a good position to find favorable auto loan terms. If your credit score is lower, you’ll probably be offered a higher interest rate. And the lower it is, the more you’re likely to pay. If your credit score is very poor—less than 450—then you may not be able to get a car loan.
Car Loan Rates by Credit Score
Let’s say, two people—Person A and Person Z—are shopping for used cars. They each have $2,000 to spend and want to pay off the loan in three years. They settle on the same $10,000 model, and the dealership happens to have two identical vehicles.
The only difference between the two people is their credit score. Person A’s score is 750, while Person Z’s score is 620. Because of this, Person A can secure a loan with a 5% interest rate, while Person Z can only get financing at an 8.5% interest rate. Because of this, Person Z will end up paying more than Person A over the three years of the loan. The additional burden would be even greater on a bigger loan.
Besides your credit score, lenders will consider your income, how much you have for a down payment, and the size of the loan you’re seeking.
U.S. News & World Report broke down average auto loan interest rates in 2020 by score:
Excellent Credit (750+)
The average auto loan interest rate for people with an excellent credit score of 750 or higher is 4.98% for a new car and 5.23% for a used car.
Good Credit (700–749)
People with good credit scores of 700–749 average an interest rate of 5.07% for a new car and 5.32% for a used car.
Fair Credit (650–699)
The average car loan interest rate for people with a fair credit score of 650–699 is 11.69% for a new car and 11.94% for a used car.
Poor Credit (450–649)
Subprime borrowers are those people with poor credit scores of 450–649. They average an interest rate of 17.08% for a new car and 17.33% for a used car.
Very Bad Credit (449 or less)
People with what’s considered very bad credit—also called deep subprime borrowers—are not always approved for a car loan. Those borrowers who are approved will pay very high interest rates: an average of 18% for a new car and 18.25% for a used car.
How a Credit Score Is Calculated
In the United States, the three major credit reporting bureaus—Experian, Equifax, and TransUnion—keep track of your borrowing in regularly updated credit reports. Your credit score is essentially a snapshot of these reports, a way for lenders to quickly and consistently consider how well you’ve handled your loans in the past.
There are a number of factors that go into calculating a credit score. The major factors are your payment history, the amount that you owe compared to your credit limit, how long you’ve been using credit, how many new credit accounts you have, and your credit mix (or the types of loans you have).
To find out your score, you can check with the credit bureaus or use a third-party provider like Credit Karma or Credit Sesame. Many banks and credit card companies will give you access to your credit score as well.
There are several different credit scoring systems, and even within the same system, scores can vary depending on which bureau’s credit report is used. Fair Isaac Corp.’s generic FICO scores are the most widely known, but auto lenders also use industry-specific FICO scores, as well as VantageScores.
How To Improve Your Credit Score
With patience and discipline, you’re likely to improve your score if you follow some simple guidelines.
Pay Your Loans on Time Every Month
Pay at least the minimum payment on all of your credit card loans, 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
If you’re maxing out your credit cards, it’s a sign to lenders that you’re strapped for cash. 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. If you have old credit cards that you aren’t using, it’s still a good idea to keep them. Closing old accounts can hurt your score by shortening your average account age and reducing your overall credit limit.
When you’re ready to buy a car, deal with that first before you consider financing for anything else. It’s also best to do your rate shopping relatively quickly so it doesn’t look like you’re applying for a bunch of new loans.
Remember, no matter how tempting it may be to go with a fancier car, you have to be able to afford your monthly payments. After all, being late or overdue will only hurt your credit score and your chances of better rates on future loans.