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Buying a car is a huge financial step, and knowing your credit score can help you enter the buying process on strong footing. A third-quarter 2022 report released in December by credit bureau Experian shows average credit scores of people financing cars rose slightly from a year ago. The report also found:
On average, the credit score for a used-car loan or lease was 678, according to the data, while the average score for a new-car loan or lease was 738.
About 66% of cars financed were for borrowers with credit scores of 661 or higher, the report shows. Borrowers with scores between 501 and 600 accounted for about 14%, while less than 2% of financing went to people with scores below 500.
A lower credit score won’t necessarily keep you from securing a car loan, but it might spike your interest rate, leading to higher payments.
In general, having a larger down payment, shopping around for financing and bringing in documents showing a good payment history on other big purchases may help you offset damaged credit.
Better credit means lower costs
Interest rates differ based on your credit score, so knowing what to expect on average can help you budget for your car. A target credit score of 661 or above should get you a new-car loan with an annual percentage rate of around 4.90% or better, or a used-car loan around 5.47% or lower.
Average APR, new car
Average APR, used car
Deep subprime: 300-500.
Source: Experian Information Solutions.
Someone with a score in the low 700s might see rates on used cars of about 5.47%, compared with 15.86% or more for a buyer scoring in the mid-500s, according to the data from Experian. Using a car loan calculator illustrates the difference that can make.
For example, on a $20,000, five-year used-car loan with no down payment, that’s a monthly payment of about $382 for the buyer with a higher credit score versus $485 for the buyer with a lower credit score. The buyer with better credit would pay about $2,904 in interest over the life of the loan, while the buyer with lesser credit would pay around $9,105. Plus, in most states, bad credit can mean higher car insurance rates, too.
The differences aren’t quite as steep for new-car loans: Borrowers with scores in the low 700s can expect an average rate of 4.90% compared with 10.11% for borrowers with credit in the mid-500s.
What is a FICO auto score?
It’s smart to have some idea what dealers will see when they check your credit profile by checking your credit score. Chances are, however, that your dealer might use a FICO automotive score instead of a traditional FICO score or VantageScore.
Your FICO auto score is a specialty score ranging from 250 to 900 that weighs past car-loan payments more heavily than the traditional FICO score does. It also gives more weight to any repossessions or auto-loan bankruptcies you might have previously filed. To check your automotive score, you can buy a full set of FICO scores at myFICO.com and then cancel the service rather than pay the fairly steep monthly fee.
Other factors beyond credit score can help you buy
If you have a credit score below 700 and are concerned about approval, prepare by focusing on the positives in your financial life. Remember, people with major blemishes on their credit are routinely approved for car loans. If you have poor credit, here are some positive financial behaviors to highlight in the finance office.
Bring a bigger down payment to the table
A big down payment can help offset a bad credit score by lowering your monthly payments. It might even help you get a lower interest rate. For some lenders, a big down payment might make you appear less risky, despite a lower credit score.
Bring documents showing financial stability
If your credit score is low, potential lenders are less likely to see you as a risk if they can see you have stability in other areas of your financial life. Bringing documentation like your most recent pay stubs and proof of address to show lenders how long you have lived at your current address and worked at your employer could help you seem more reliable.
Consider bringing your own financing
While dealerships do provide financing, checking with your local bank or credit union is a good idea, too. You can even compare car loan rates online. Compare quotes from the top potential lenders and, once you’ve settled on your top choice, you can get preapproved to make the process run smoothly.
Keep in mind that getting financing results in a “hard pull” on your credit. It helps to cluster applications closely together when rate-shopping for a loan.
If you end up with a loan with a higher rate than you wanted, keep an eye on your scores. You may be able to refinance your auto loan at a lower rate after you’ve made on-time payments for six to 12 months.
Build your credit before car shopping
If you still aren’t getting car loan rates that work for you, it might be time to delay your car purchase and work on building your credit. That means:
Paying bills on time. A payment that goes 30 days past due can devastate your score, so pay at least the minimum on time.
Keeping credit card balances low compared to your credit limits. How much of your limits you're using is called your credit utilization, and it has a big effect on your score. You can try a number of tactics to lower your credit utilization in order to bump up your score.
Avoiding applications for other credit within six months of applying for a car loan.
Keeping credit card accounts open unless there's a compelling reason to close them. Closing cards reduces your overall credit limit, which can hurt your credit utilization.
Your car loan can help you build better credit
Once you've secured your car loan, it will help you build credit in two important ways: payment history and credit mix.
Payment history is your track record of paying bills on time. It accounts for more of your credit score than any other single factor. Traditional lenders report your payments to the three major credit bureaus, which provide the data to calculate your credit scores. (Note: Buy-here, pay-here lenders often do not report payments to credit bureaus. These loans not only tend to have high interest rates, they also won't help you build credit if payments aren't reported.)
Credit mix means whether you have both installment loans (with equal payments over a set period) and revolving credit (variable payments and no set end date, as with credit cards). If you have mostly — or only — credit cards, adding a car loan may help your score a bit.