What is a Good Credit Score to Buy a Car?
By: Heather Hanks May. 22, 2019
What is a good credit score to buy a car? That’s the million dollar question. Buying a car is a big deal. It requires good credit to show that you’re a responsible bill payer. Without a credit score car loan, most people can’t afford a car. This is because not many people have cash to buy a car. The truth is that you need a good credit score to get a car loan. But how good does it have to be?
The better your credit score is, the more favorable the terms and conditions of your loan will be. Bad credit means that you may have to pay more money for the same car then someone with good credit. You may even be denied the car of your choice if your credit is not good. This article discusses what's a good credit score to buy a car and tips for how to bring your credit score up to speed. Here’s what credit score needed for car loan so that you can drive away in the car of your dreams.
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What Is a Credit Score?
You've been told that you need a credit score to finance a car, but what is credit and what does it have to do with buying a car? Your credit score is a three digit number that refers to your credit worthiness. This includes how likely you are to pay your bills on time. Banks and lenders use your credit score to determine whether or not they will extend you a loan. The better your credit score is, the better the terms and conditions of the loan will be. There are several factors that are used to determine your credit score. These include your ability to make timely payments, your credit history and how much debt you have.
The most important thing that banks look at is how likely you are to pay back your bills on time. These include any bills you have, such as your mortgage, rent, and utility bills. Your credit score is calculated by one of three major credit reporting business bureaus. They include Experian, Equifax, and TransUnion. These three agencies have copies of your credit report. When you take out a loan, your financial behavior is sent to these three agencies and recorded on your credit report.
Research shows there are five main factors that make up your credit score:
Approximately 35% of your credit score is based on payment history
This includes your payment information, judgments, or bankruptcies. It also includes how long your overdue payments are and any past due amounts that you have.
Approximately 30% of your credit score is determined by your amounts owed
This includes all of the money that you owe on previous accounts. This number is added up and reported to the three major credit reporting agencies as a whole. The amounts owed also contains the number of accounts you have open with balances as well as any installment loans that you own.
Approximately 15% of your credit score is determined by the length of your credit history
Banks and lenders like to see that you have a long history of making timely payments. This shows that you have been financially responsible for many years and are more likely to keep it up rather than someone with short credit history. Your credit history includes the amount of time your accounts have been open since you activated them.
The last 20% goes to new credit and types of credit
New credit involves the number of new credit lines you opened and when you opened them. It also includes the amount of accounts you have open in total. This information includes any recent credit card inquiries and shows how your credit score has fluctuated along the way. The types of credit you use includes what times of accounts you have open. For example, this may include a credit card, a retail account, and mortgage. It may also include installment loans and how many you have active.
All of these five factors make up your total credit score.
Any negative items that appear on your credit may show up for seven years. This excludes bankruptcy, which shows up for ten years. Lawsuits and judgments also show up for seven years. You can have negative items removed from your credit score by disputing them. It’s a good idea to check your credit report for errors to make sure your credit score is fair and accurate. Credit scores are important because you need a credit score for car loan. Having good credit means you’ll have more favorable car loan terms, such as a good interest rate. You’ll end up paying less for your car than someone who has bad credit. You car loan credit score can determine what vehicle you can afford. You also need a credit score to lease a car.
Prosper likes to see that you have a minimum credit history of two years. Most Prosper customers have a minimum credit history of 11 years. You’ll want to make sure you have recent activity to prove your account status. Prosper states that they use a variety of data to determine your eligibility. This may include your income, employment status, and credit score. Keep in mind that each state has different regulations. You may want to check with your state to determine your eligibility and whether or not you qualified to borrow from Prosper.
Why Is a Credit Score Important for Car Buyers?
Car buyers want a good credit score because it dictates your loan terms. Most people need a credit score to buy a car unless you are paying for your car with cash. A 500 credit score car loan will get you less car than a 750 credit score car loan. In other words, a bad credit score can make you pay more money for your car than someone with good credit. This is because your credit score dictates how likely you are to pay back your loan on time. A bad credit score signals that you are not responsible enough to pay your loan back and banks won’t want to take a chance on you. Your credit score represents how likely or unlikely you are to default on your loan. Car credit score helps you get into the car you want at a price you can afford.
A good credit score can help you get a low interest rate. You’ll end up paying less for the car you want over time with a lower than average interest rate. If you have bad credit, then banks will offer you a loan but at a high interest rate. This ensures that you are worth the risk they are taking by lending you money. A good credit score can also determine how much money you will be extended. You might not be able to get the car you want if you aren’t offered enough money. Your credit score dictates how much money you’ll be offered. It also dictates your interest rate, repayment terms, and how long you have to pay back the loan. This is why your credit score needed to buy a car is important. Without good credit, you might have to settle on a car that you didn’t want.
What is a good credit score to buy a car?
What credit score is needed to buy a car? The answer varies depending on what you need. You don’t need to have perfect credit to buy a car, but you’ll need good credit. The better your credit score, the more money you’ll be offered. A 700 credit score car loan can get you a lot more car than a car loan with 550 credit score! Here is how FICO categorizes credit scores and where you need to be to buy the car of your dreams.
Excellent
760+
You are considered to have excellent credit when your credit score reads 760 and higher. This indicates that you have a long credit history of making timely payments. It also ensures that you have a variety of different credit lines open and have proven yourself financially. Excellent credit can get you into the car of your choice with favorable terms. For example, you can pick the car of your choice and obtain a loan with low interest rates. You should be able to pick your repayment terms that best suit your needs. You will have the most options when you buy or lease a car with excellent credit. This applies to other areas of credit as well, such as buying a house.
Very Good
725 – 759
Very good credit is considered between 725 and 759. You can also obtain a favorable loan term when you have very good credit. Most people achieve very good credit when they have a long history of paying their bills on time. This may include a time period of at least seven to ten years. If you have very good credit, then you will likely be offered a good car loan with low interest rates. This should get you into just about any car you desire.
Good
660 – 724
A 650 credit score car loan or 700 credit score car loan is still good. You will still earn low interest rates, but not as low as if you have very good or excellent credit. A good credit score can help you obtain a loan with a low interest rate and favorable repayment terms. Credit scores that drop below this range may not see as many perks as someone with good credit.
Fair
560 – 659
Car loans with 600 credit score are considered fair. This means that you may not be afforded the loan you need to purchase or lease the car of your choice. Many people with fair credit can still get a loan, but it comes at a price. You may experience high interest rates that cause you to pay more money over time when compared to someone with good credit. If you have fair credit, then you can take steps to improve your credit before buying a car to get the best rates.
Poor
300 – 559
Someone with poor credit may not be able to get a loan for a car. This is because poor credit indicates that you are not as financially responsible as someone with good credit. Missing payments or making repeated late payments will cause you to have poor credit. If you have poor credit, then we recommend raising your credit score before applying for an auto loan. This can help boost your chance of obtaining a loan as well as decrease the amount of times that you apply for a loan. Having too many inquiries for loans on your credit report can negatively affect your score. For this reason, we recommend only applying for credit when you have no other options.
How Credit Score Affects the Terms of Your Auto Loan?
Your credit score determines whether your loan terms will be favorable or not. Favorable terms include low interest rates, affordable monthly payments and even 0% financing. The average car loan interest rate by credit score varies. Having good credit is almost guaranteed to get you a good interest rate. Someone with bad credit will be expected to pay more interest. A bad credit score may also lead to larger down payments. This means that you will have to put more money down than someone with good credit to obtain the same car. People with low credit scores are assumed to be a risk. This means that the lender will need more money from you to indicate that you won’t fault on the loan. When you fault on a loan, the bank is responsible for paying your balance. To avoid these situations, banks charge more if you have poor credit to make up for the risk they take when they work with you. Banks and lenders are much more likely to allow flexible terms on your behalf if you have good credit.
Credit Scores and Car Insurance
Your credit score can determine your car insurance rates. Having good credit means that you will likely benefit from low car insurance. Insurance companies look at your credit score to determine how financially responsible you are. This responsibility often transfers over to being a good driver. Having bad credit is a sign that you may have a habit of making irresponsible decisions. Insurance companies may charge you higher rates if you are considered a risk.
On the other hand, insurance providers like to see that you have good credit because it shows responsibility. People who have bad credit or no credit may have to pay a larger amount for car insurance than someone with good credit. This is another reason why it's important to improve your credit score before buying a car. If you buy a new car, then most insurance providers recommend you get full coverage. This can become pricey due to the rising cost of insurance rates if you don't have good credit. If you don't land a good insurance rate, then you may have to settle for a cheaper car so that you can afford both monthly payments.
Credit Scores and Car Leasing
What credit score is needed to lease a car? It doesn’t differ much from buying a car. The credit score needed to lease a car is still high. Having good credit means you’ll still be offered a good loan for your car lease. The minimum credit score to lease a car depends on the lender. Some lenders will work with you if you have poor credit but will charge you higher interest rates. Others require you to have good credit before working with you at all.
What can I do to improve my score before shopping for a car?
It’s a good idea to improve your credit score before shopping for a car. This is because the more times you apply for credit, the more you’ll hurt your score. Having good credit to begin with ensures that you’ll be able to get the car you want with the most favorable terms.
Here are some things you can do to improve your score before shopping for a car:
1
Get rid of your debt
The best thing you can do to immediately improve your credit score is to start chipping away at your debt. Contact your lenders and have your loans consolidated. This ensures that you’ll make one small monthly payment instead of one large one. Most companies will remove you from debt as long as you are making payments. You can work will collections agencies to make small monthly payments. As long as you are making payments on your debt, you will be moving in the right direction. You will eventually boost your credit score once your debt is paid off.
2
Start making timely payments
You can start making all of your payments on time immediately. This is the best way to boost your credit score. Lenders and creditors like to see that you have a long history of making timely payments. Make all payments on time, even ones that you don’t think matter. Rent, utilities, mortgage, and auto loans all appear on your credit score. Get into the habit of making timely payments and your credit score will improve within six months.
3
Don’t apply for a loan often
Applying for credit or a loan often can land you in bad credit territory. Applying for credit shows vulnerability or inconsistency. Lenders want to see that you only apply for credit when you need it and not when you’re desperate for a loan. Every time you apply for credit, most creditors will run a hard pull on your credit score. Each time you run a hard pull, it drops your credit score around seven points. This might not seem like a lot, but it can add up over time if you’re not careful.
Ways to Improve Your Credit Score
The best way to improve your credit is to start making all payments on time. This ensures that you will build a strong credit history. You can work on improving the five areas of your FICO score to boost your credit. This includes paying off amounts owed, taking out new lines of credit when you can, and paying off debt. If you have a hard time remembering to make payments, then you may want to consider setting reminders for yourself. You can set up your smartphone to send push notifications to yourself when bills are due. This is a great way to remind yourself when it comes time to make payments.
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Look for reminder apps where you can schedule all your bills. Enter the due dates and let your phone send emails or text messages to you when it’s time to pay them. You can also look into auto payments. This occurs when your bill comes right from your bank account every month. The bill will be paid on time and you don’t even have to lift a finger! You may want to meet with a financial advisor if you’re having a hard time making ends meet. He or she should be able to help you manage your finances. A financial advisor should also be able to tell you where you need to make cuts or how to best rearrange how you spend your money.
You can also improve your credit score by taking care of all past due balances. This includes any debt or accounts with balances open. Meeting with a financial advisor may give you some insight on how to pay these off. Make small monthly payments until all debt is paid off. If you’re serious about removing negative items from your credit report, then consider a credit repair company. You can always challenge these items yourself, but hiring a professional company might be best. Keep in mind that negative credit items may continue to appear on your report for 7 years or more if you do not have them removed. The absolute best way to improve your credit score is to make every payment on time for as many years as possible.
Finally, you may want to look into piggybacking services as a way to boost your credit. This includes becoming an authorized user on someone else's account. Their credit report information will show up on your credit report. This helps you instantly boost your credit score.
Disclaimer
CreditNervana promises to keep our information as accurate and up-to-date as possible. However, you should always consult a financial advisor for specific questions about personal or business finances and investment opportunities, especially if you are looking in your area. Working with a trained professional who is familiar with your case is a safe and guaranteed way to make the best investment decision possible. Please review our terms and conditions before making any decision based on the information we provide. Financial institutions are constantly changing. Because of this, it’s a good idea to cross check the information you read here with any company you are considering working with.
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