People usually label cars as expensive, but little do they know that their credit score determines the final price they will be paying. To purchase a vehicle, you must take out an auto loan. The interest can add additional dollars to your total vehicle price. Do you know what’s interesting? Your credit score is responsible for inferring your interest rate. So, what credit score do you need for an auto loan? We will discuss it below, but let’s learn about a credit score first!
What is a “Credit Score”?
Your credit score is a three-digit score that estimates your ability to pay off the loan. You can find your credit score effortlessly through the top three bureaus like Equifax, Experian, and TransUnion. They use your payment history and information from financing as criteria to generate your credit score.
Banks and loan lenders use your FICO score as a factor to determine your credibility. You will get a loan with better terms if you have a good score.
Factors that lenders notice in a credit score.
Here are the five components that make up your credit score. Note that each of them holds a different weightage.
1. Payment History 35%
Your payment history, meaning how well you are keeping up with the monthly loan payments, the loan terms, and credit card payments, makes up a big part of your credit score. If you miss or delay a monthly loan payment, your credit score will be affected drastically. It can also ruin your chance to land on an auto loan with a low-interest rate. However, you can better this section of your credit score by paying early or keeping track of credit card debts.
2. Outstanding Debt 30%
To be simple, if you have less outstanding debt, your chances to increase your credit score are higher. Furthermore, you can also get a good auto loan with a good credit score!
3. Credit History Length 14%
If you have a lengthy record of being responsible with credit, it is beneficial for you! It shows that you can professionally manage your debt and are a reliable borrower. When you are in your twenties, it is a difficult task, but you can achieve it by cutting down your credit card use.
4. Account Age 10%
This factor is not just the amount of years. All lenders prefer a well-established credit history because it assures them about your reliability and willingness to pay back the auto loan. Therefore, it positively impacts your credit score and overall auto refinancing process. But make sure that you don’t get new credit cards together because it may negatively impact the lenders and lower your FICO score.
5. Types of Credit Used 10%
Lenders prefer variety on your credit card, meaning a lender would be impressed if you can handle multiple credits. It will reflect your capabilities and experience in auto loan handling.
What credit score do you need for an auto loan?
Mostly, lenders have set their limits on credit scores. But according to experts, a FICO score above 700 is enough to obtain a car loan with a better interest rate. However, if your score is over 800, you are guaranteed an excellent loan.
What are the ways to check my credit score?
Consider requesting a free credit report if you are behind your credit score. You can get it by reaching out to Equifax, TransUnion, or Experian. You can also apply to check for any errors.