Car Finance: What Is A Good Credit Score
As the three major credit reference agencies have their own scoring system, its not possible to say definitively. However, they do at least group their scores into bands so that lenders can see what level of risk a customer represents at a glance. There are five bands labelled very poor, poor, fair, good and excellent.
The scores calculated by TransUnion and Equifax range from 0-710 and 0-700 respectively. The higher the number, the better the rating. For TransUnion the band for a person they deem to be a good risk spans from 604-627 but for Equifax it’s 420-465.
Experians credit scores range from 0 to 999. It defines a good risk as someone with a credit score of 881-960.
Being regarded as a good risk is important because it means that, assuming the lender is also confident that you can repay the loan , you have a better chance of not only getting a loan but one with a low interest rate, too – meaning that you would pay less overall.
Having a fair score won’t bar you from being given a loan but it’s likely to be at a higher interest rate – increasing your monthly payments – and for a lower amount than you might want.
How Is A Credit Score Calculated
A credit score is calculated, firstly, by the credit reference agencies. It is based on a report they produce that contains records of your financial dealings and aspects of your personal history.
Financial data includes evidence of current and previous loans, utility contracts and phone contracts, plus your repayment history concerning them. If youve missed repayments or defaulted on debts, these will negatively affect your credit score. Having multiple bank and credit card accounts will also affect your credit score, since they increase your exposure to additional lending.
In terms of personal history, a credit score will assess your employment status and address . The score will also consider financial relationships with people or partners who may themselves have a good or bad credit score. If you have a joint account with someone who has a poor credit score, this is likely to negatively affect your own credit score.
It will also take into account any county court judgements you have been issued for failure to pay fines or debts and whether you have entered into an individual voluntary arrangement to clear outstanding debts.
The resulting credit scores calculated by the agencies are helpful to lenders because they save them the trouble of poring over your financial and personal history when you make a loan application.
If I Shop Around For An Auto Loan Wont Multiple Pulls Lower My Credit
Many people are nervous to shop around for auto loans since theyve heard that multiple credit pulls can negatively impact their credit score.
While there is certainly truth to this assumption, for the sake of comparing rates, the law states that all credit pulls that occur within 14 days must be combined into a single credit pull so that it doesnt negatively impact your credit score. So make sure to wait to compare loans and to have your credit pulled by a lender until you know you are ready to purchase a vehicle.
Starting April 20,2020, Experian, TransUnion and Equifax will offer all U.S. consumers free weekly credit reports through April 20, 2022 at AnnualCreditReport.com to help you project your financial health during the sudden and unprecedented hardship caused by COVID-19.
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How Bad Credit Can Affect Your Car Loan
If you score a 700 or higher, you will get the best interest rate on an auto loan. If your score is lower than 580, you could be looking at an interest rate as high as 20 percent. In addition to your credit score, lenders will look at your debt to income ratio, length term of the loan, amount needed, and the age of the vehicle. Check out this article that details the five things lenders use to decide auto loan interest rates.
As you shop for a car, try to avoid buy here pay here dealerships, these types of dealerships often do not report to credit agencies, thus your score wont change even if your loan is paid on time and in full.
What Is A 700 Credit Score
A credit score of 700 or more is generally considered favorable for a score ranging from 300 to 850.On the same scale, a score of 800 or more is deemed good.The majority of people have credit scores ranging from 600 to 750.The average FICO® Score in the United States in 2020 was 710, up seven points from the previous year.Creditors may be more confidence in your ability to repay future obligations if your score is higher. When reviewing consumers for loans and credit cards, creditors may define their own standards for what they regard to be good or negative credit ratings.
This is dependent on the types of borrowers theyre looking for.Creditors may also consider how current events may affect a customers credit score and change their requirements accordingly.
Some lenders design their own unique credit rating programs, however the FICO® and VantageScore® credit scoring models are the most widely utilized.
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What Does That Mean For You
In general, it means that although different lenders use different measures, people with exceptional credit scores may qualify for the lowest rates, while people with lower credit scores will often qualify only for loans with higher rates.
High Credit Score Low Interest Rate Lower Credit Score Higher Interest Rate
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Will I Be Able To Get A Car Loan With A Bad Credit Score
If your credit score is lower than 670, there is no need to panic- you can still get back on the road! A 2016 report from the Financial Consumer Agency of Canada noted that approximately 25 percent of all vehicle financing went to customers who were considered non-prime , based on their credit score.
The table below from Bankrate.com shows the average interest rate by credit score for Americans who secured an auto loan at the end of 2016 :
As you can see, customers whose credit scores were lower were able to receive vehicle financing. Unsurprisingly, based on the level of risk involved, customers who have a credit score that is 660 or lower should be prepared to pay higher interest rates than their prime and super prime counterparts.
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How Does My Credit Score Affect My Auto Loan Rate
Depending on your credit score, the interest rate you receive can vary widely. In fact, the difference in interest rates on a new car loan for someone with excellent credit versus someone with very poor credit can vary by as much as ten percentage points.
Use our 3-step loan calculator to determine the difference in interest rates.
For example, if your excellent credit qualifies you for 6% interest rate on a $18,000 vehicle rather than the 12% interest rate for which a less-than-stellar credit score might qualify, you’ll save more than $50 each month over the five-year term of the vehicle loan. That’s a $3,000 savings thanks to your good credit!
When it comes to car buying, your credit score plays a major role in the type of financing that’s available to you. For people with a strong score, this works in your favor. You might be in the perfect position to obtain an auto loan.
For those with lower scores or no credit, this may pose a bit of a challenge, but don’t despair! There are actionable steps you can take toward improving your score. The good news is that a properly managed auto loan can improve your credit score moving forward. So once you secure an auto loan, you can work toward strengthening your credit history for your next car, truck, or recreational vehicle.
Now that you are armed with all the facts you need to obtain an auto loan, all that’s left to do is find the right vehicle for you.
What Should I Do If My Credit Score Is Low
It depends on what your options are. If you absolutely must have a new car right now , then youre going to have to settle for a higher interest rate. However, if you have the option, it is a very smart idea to take public transportation, carpool, walk, bike, or even borrow a car from a friend instead of buying a new vehicle with less than stellar credit. Often, free credit reports will show you a list of a few reasons why your score is the way it is. If your credit score is low because you have high balances on your credit cards, spend a few months paying down the balance before you even think of going to the car lot to look at vehicles. If your in the short-term, then you should consider talking to a certified financial planner and discuss your options.
If you absolutely must have a car and are looking to save money, you are probably considering buying a used vehicle instead of a new one. Aside from the obvious fact that the sticker price will be lower, if your monthly car payment is lower, this will also allow you the financial wiggle room to focus on fixing your poor credit score. But you should be aware that interest rates are often higher for used cars than they are for new cars. The lower your credit score, the bigger the differential will be between the used and the new rate. While it will likely still be a better deal for you to buy a used car, its worth crunching the numbers if you have a really low credit score.
What Is The Auto Insurance Score
Your Auto Insurance Score represents your risk potential as a driver. The AIS is typically assigned by insurance companies in order to assess the likelihood of your filing a costly claim.
Although your driving record and auto claims history are both considered in the calculation of this number, neither is surprisingly the highest priority. Insurers use your credit report as the key source to figure out your AIS. This may seem counterintuitive, but studies support the practice of correlating driving risk and credit history.
The main point that insurers are concerned with is the amount of financial liability youve taken on in the past. Unlike mortgage companies, they dont care as much about your current income or job history. Taking all this information into account, your credit score can be a major predictor of your AIS.
Go To A Dealer That Specializes In Buyers With Poor Credit
If you cannot qualify for a loan at a traditional dealership, you may be able to get financing from one that specializes in buyers with poor credit. Typically advertised as buy here, pay here dealerships, they offer in-house financing for used vehicles.;
However, these dealers tend to charge very high interest rates to offset the risk of lending to borrowers with lower scores. As of 2020, the average interest rate offered by independent dealers to deep subprime borrowers was 21.31%.
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How To Improve Your 700 Credit Score
A FICO® Score of 700 provides access to a broad array of loans and credit card products, but increasing your score can increase your odds of approval for an even greater number, at more affordable lending terms.
Additionally, because a 700 FICO® Score is on the lower end of the Good range, you’ll probably want to manage your score carefully to prevent dropping into the more restrictive Fair credit score range .
40% of consumers have FICO® Scores lower than 700.
The best way to determine how to improve your credit score is to check your FICO® Score. Along with your score, you’ll receive information about ways you can boost your score, based on specific information in your credit file. You’ll find some good general score-improvement tips here.
Add Rent And Utility Payments To Your Credit Report
The good news is there are legitimate free and low-cost ways to improve your credit scoreno magic tricks required.
Experian offers a free service, Experian Boost, that allows consumers to add to their credit history payments not traditionally reported to credit reporting agencies, including bills for cell phones, utilities and streaming services.
They give us permission to access their checking, savings or credit card accounts for those payments and we add those payments to their credit reports, Experians Griffin said. That is one of the most empowering things weve seen for peopleit places the choice in their hands.
People with scores of less than 680 are increasing their credit scores an average of 19 points, Griffin said. In general, consumers see an average increase of 13 points, he said.
Experians data has shown that adding these payments does not skew credit scores inaccurately, but instead helps lenders identify new customers who are actually good credit risks, Griffin said.
Similar programs include
- eCredable Lift, which reports your phone and utility payments to credit reporting agency TransUnion for $25 a year
- Experian RentBureau, which allows consumers to add on-time rent payments to their credit history
- A free app called Perch, which reports payments for streaming services and rent
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How Good Is A 700 Credit Score
Lenders will consider your credit score when determining rates. According to Experian, here is a snapshot of what type of loan and rate you can expect based on your history:
- 781-850: Superprime loan at 3.65% or 4.29%
- 661-780: Prime loan at 4.68% or 6.04%
- 601-660: Nonprime loan at 7.65% or 11.26%
- 501-600: Subprime loan at 11.92% or 17.74%
- 300-500: Deep subprime loan at 14.39% or 20.45%
As you can see, a 700 credit score puts you in the good or prime category for financing, making 700 a good credit score to buy a car. While its always a good idea to get your credit score in its best possible shape before buying a car, if youre already around the 700 range you will be good to go.
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Waiting Isnt A Bad Idea
Waiting to take out an auto loan allows you to:
Hunt for better deals and discounts.
Spend time building your credit score.
Build up a solid history of on-time bill payments.
Save more money for a down payment.
All of these actions will help you secure a more affordable loan.
While you are waiting, avoid applying for any other forms of credit. If hard inquiries are made on your account, your score will take a temporary hit.
Lastly, when the day finally comes to buy your ride, go for a used car, keep the financing term to a maximum of four years, and put down as big of a down payment as possible .
Doing so will minimize your interest payments and help you avoid negative equity .
Is 700 A Good Credit Score To Buy A Car
Many lenders employ auto-specific credit scores, which place a greater emphasis on past car-loan payments. According to Experian data, a buyer with a credit score in the low 700s might see rates on used automobiles of roughly 6.05 percent, compared to 17.78 percent or more for a buyer with a credit score in the mid-500s. If youre concerned that your credit score will prevent you from purchasing a vehicle, youre underestimating how eager car dealerships are to sell you one.However, a higher credit score will almost surely result in a reduced loan interest rate.
With a , you should be able to secure a car loan with an interest rate of roughly 6% or less.
Contact the pros at Ability Mortgage Group today to help get you mortgage approval.
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What Is The Average Credit Score To Buy A Car
While following the crowd is not always the wisest financial decision, it can be useful to see where you stand compared to other car buyers.
A mid-2020 report from credit bureau Experian reveals the average score for new and used car loans to be 721 and 657, respectively.
That means the average buyer of a used car does not qualify for the best interest rates, while new car buyers barely qualify.