Your Credit Score and Auto Loans
If you’re planning to purchase or refinancing your car, having a good credit score is essential. Not only does it have a major impact on the interest rate you can get, but if your score is too low, you may not be able to get any financing at all. Even if you are leasing instead of buying, your credit score will likely be checked.
Your credit score is a numeric summary of the information in your credit report and is formulated to predict the risk you will not repay what you borrow. The most commonly used scoring model is issued by the Fair Isaac Corporation. Called a FICO score, it ranges from 300 to 850, with a higher score being indicative of less risk. To get a car loan with a reasonable interest rate, most lenders require a score of at least 620. To get the best interest rate, you usually need a score in the mid-700s.
What if your credit score is low and your application is denied? One option is to ask someone with good credit to co-sign on the loan. Be especially careful with this type of arrangement – any late payments you make will not only reflect poorly on your credit report but your co-signer’s as well. Another option is to work on improving your credit score so that you can get a loan on your own. It may take time, but there are many things you can do:
- Always pay on time: A commitment to never make a payment late again is one of the most powerful steps you can take to improve your credit rating.
- Pay down existing debt: Even if you have never missed a payment, a large debt load will lower your score. Explore ways you can lower your interest rates and free up cash to pay more than the minimums.
- Avoid taking on additional debt: Besides paying down existing debt, make an effort to not take on more debt in the future. For revolving credit, ideally you should not charge more than you can pay off in full the next month, but at the very least, keep the balances under half of the credit limits.
- Pay collection accounts: If you have collection accounts on your credit report, you can give your score a boost by paying them. Request payment arrangements for balances you can’t afford to pay in full or settle, and make sure to confirm the agreements in writing.
