What Credit Score Do You Need To Buy a Car?

credit scores and auto loans

The Balance / Julie Bang

It's better to ask, "What credit score do you need to get a good deal on an auto loan?" rather than "What credit score do you need to buy a car?" It's always to a dealership's advantage to sell you a car, so the salespeople are going to do everything they can to secure financing for you. This is the case even if your credit isn't stellar, but you might have to pay a ridiculously high interest rate.

Key Takeaways

  • You'll most likely be able to secure auto financing if your credit score isn't "deep subprime" or very bad, which is considered to be 450 or less, but it will cost you more.
  • Having a higher credit score can save you considerable money over the life of your car loan.
  • The difference between poor credit and excellent credit can equate to a 17% higher interest rate on a car loan as of 2022.
  • It might be worth it to wait a bit and work to improve your credit before you set out to finance a car.

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.

Lenders will also 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 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.

  Credit Score Rate on Used Car Loans Rate on New Car Loans
Excellent credit  750+  6.58% 6.33%
Good credit  700-749  10.89% 10.64%
Fair credit  600-699  14.52% 14.27%
Poor credit  451-599  17.77% 17.52%

How Is My Credit Score Calculated?

The three major U.S. credit reporting bureaus are Experian, Equifax, and TransUnion. They keep track of your borrowing habits and publish them in regularly updated credit reports. Your credit score is a snapshot of these reports. It provides a way for lenders to quickly and consistently see how well you've handled your loans in the past.

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.

There are several different credit scoring systems, and scores can vary even within the same system depending on which bureau's credit report is being used. Fair Isaac Corp.'s generic FICO scores are the most widely known, but auto lenders also use industry-specific FICO scores and VantageScores.

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.

Frequently Asked Questions (FAQs)

What credit score do I need to buy a car with 0% interest?

Car dealers may offer auto loans with a 0% interest rate for a fixed period of time, such as six months or one year. You can buy a car with 0% interest if you can pay off your car loan in that time period. Otherwise, interest will start being charged at that point. But you may find that there are penalties or fees for paying the loan off early. You'll generally end up paying interest if you take out a loan to buy a car.

How does paying off an auto loan affect my credit score?

Paying off debt of any kind, including your car loan, will improve your credit score. It shows that you have a history of making on-time payments. It will also lower your debt-to-income ratio, which will make you more attractive to lenders.

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