After you shop for a new car, truck, or SUV and choose a vehicle that suits your needs, you may need to get an auto loan to pay for it. To determine the loan’s annual percentage rate (APR) or the interest rate plus origination and other fees, a car dealership, bank, or credit union checks your credit score. Different lenders can check different credit scoring models, and the same lender might receive several scores.
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Credit scores are based on the information in your credit report. Lenders use these scores to help them predict whether or not you are likely to make payments on time in the future. Some employers also check the credit scores of potential employees, and landlords may check the scores of renters as well.
You probably won’t know exactly which credit score a company will check after you apply for an auto loan. However, it’s a good idea to learn which scores get checked for car loans most often, how credit scores work, and how to improve them to help you prepare to take out a loan.
What Credit Scores Do Car Dealers Use?
Car dealers can choose between many credit bureaus and credit scoring models when they evaluate auto loan applications. The fundamentals behind credit scoring models for consumers are similar, but each one uses slightly different criteria to analyze your credit report and assign a score. For example, one credit scoring model could ignore paid collections accounts, while another might consider collections accounts as negative items, even after the debt is paid.
These credit scores can be different from each other by as much as 100 points. However, they all rely on similar analyses of your credit reports. Actions that can help one credit score, like making payments on time, could improve all of your credit scores.
Here are some of the most common scores used:
Base FICO Score
FICO stands for Fair Isaac Corporation, and the organization is one of the most popular sources of credit scores. The base FICO score is also called FICO Score 8 or 9. It’s not designed specifically for auto loans, but many lenders use it. It’s a number between 300 and 850, and a higher score means that a person is more likely to make loan payments on time. This score is usually based on credit report information from one of the three major credit bureaus: Equifax, Experian, and TransUnion.
FICO Score 9 is newer than FICO Score 8, and it reduces the impact of medical debt. It also adds records for rental payments when landlords report this information. These changes can help people without much history improve their credit scores.
An average credit score is about 700. Scores above 670 are considered good. Many lenders offer people with FICO scores above 740 lower interest rates because their risk of default or repossession is very low.
A fair credit score is 580 to 669, and a poor score is 300 to 579. Even with a low score, people can often qualify for car loans. However, they may need to pay higher interest rates, pay more in fees, or make a larger down payment.
FICO Auto Scores
Several versions of the FICO Auto Score are available. It was created especially for auto lenders. FICO Auto Scores are based on a general FICO Score. Then, the score is changed to better predict a person’s ability to repay a car loan on time.
Your past payment history with auto loans is very important for determining your FICO Auto Score. This type of credit score ranges from 250 to 900.
The three major credit reporting agencies released VantageScore together in 2006. According to Experian, the average VantageScore is 680. VantageScore versions 3.0 and 4.0 are popular for auto loans, and most lenders use one of them.
These credit scoring models calculate many variables on your credit report. Payment history is the most important. Other factors include type and length of credit and credit utilization. The amount of debt owed has the lowest impact.
CreditVision is a TransUnion credit score that’s designed to help auto dealers and lenders approve loans. It anticipates the odds of a 60-day delinquency in the first two years of an auto loan. Like the FICO score, this score ranges from 300 to 850 points.
How Credit Scores Work
FICO and other credit scores are based on a variety of factors:
Your payment history makes up 35 percent of your credit score. Making credit card, loan, and utility payments on time helps increase your credit score and avoid late fees. It shows potential lenders that you can make reliable payments and avoid financial troubles that could lead to a default or an eventual repossession.
Credit utilization is about 30 percent of your score. It’s based on the percentage of your available credit that you’re using. For most people, much of their available credit comes from revolving credit lines like credit cards.
People with good credit scores don’t normally use more than 30 percent of their available credit, and people who use less of their available credit have even better scores. For example, someone with several credit cards and a total available credit limit of $20,000 could carry about $6,000 in credit card debt without lowering their score. That’s a 30 percent credit utilization.
Borrowing more could impact your credit report negatively and lower your credit score, whether a lender checks FICO, VantageScore, or CreditVision. The best credit scores have less than 6 percent credit utilization.
To check the amount of your credit utilization, divide the amount of your debt by the total amount of your available credit. In the example above, $6,000 divided by $20,000 would be 0.3 or 30 percent.
The Length of Your Credit History
The length of your credit history accounts for about 15 percent of your credit score. A longer credit history is better, so it’s best to keep accounts open in many circumstances. For example, keeping a credit card account open, even when you don’t use it often, is usually better than closing the account.
Closing a line of credit reduces the average age of all your accounts. It can also increase the percentage of your credit utilization by reducing the amount of your available credit. Opening a new account can decrease the average age of your accounts as well, but it can also improve your credit utilization percentage.
The Amount of New Credit
The amount of new credit a person has counts for about 10 percent of your credit history. Getting some new credit occasionally can improve your credit score in the long term. However, many lenders view a person who applied for several credit accounts within a short time as high risk. An individual who needs lots of credit within a short period of time could be suffering from financial difficulties, and they might not be able to repay all of their loans on time.
Your Credit Mix
Your credit mix refers to the variety of credit and other accounts you have. It’s about 10 percent of your credit score. Someone with a wide range of accounts usually has a better score. For example, someone with good credit might have accounts in their name with utility companies, two or three credit cards, and a car loan. They could also have some student debt or a mortgage.
How to Improve Your Credit Scores
No matter which credit score a car dealer decides to use, you can improve your score by paying all of your bills on time and keeping the balances on your credit cards low. This keeps your credit utilization low and helps you save money on interest. Setting up automatic payments can help you avoid paying any bills late, and it can make taking care of your bills less time-consuming. Additionally, only apply for a new line of credit when you need it. Getting a larger loan may be better for your credit than applying for more than one smaller loan.
If you’re not sure exactly how much you’ll need in the future, you can also consider a revolving line of credit like a credit card or a loan paid in regular installments like a car loan. You might also consider a debt consolidation loan, which allows you to save money on interest and combine the payments for multiple loans. Debt consolidation may bring your credit score down temporarily, but it can help you raise your credit score over time by making your payments more manageable. It can also help you catch up on any accounts that are past due.
When you apply for any loan, it’s a good idea to consider offers from several organizations. Some companies give better annual percentage rates (APRs) than others. You may be able to get a better deal if you already have an account with the lender.
When comparing lenders, it’s important to think about how hard inquiries could impact your credit score. The lender conducts a hard inquiry on your credit report when you apply for a loan. This can bring your credit score down slightly. All inquiries within the same 14-day time period count as just one credit check, so you can compare a variety of offers and choose the car loan that suits your needs most.
If you’ve been a victim of identity theft or you think someone may have gotten access to your credit card numbers, Social Security number, and other information, you can freeze your credit reports with the three major credit bureaus. When Experian, Equifax, and TransUnion place freezes on your accounts, no one can access your credit report. A freeze can also keep negative information from identity theft from appearing on your credit report. However, you’ll need to unfreeze your credit reports before you can apply for another line of credit.
Frequently Asked Questions About Credit Scores
Understanding the answers to the most frequently asked questions about credit scores may help you get a better deal on your next car loan:
How Can You Check Your Credit Score?
Many banks and credit card companies will give you your credit score for free. These inquiries are considered soft credit checks, so they don’t reduce your credit score or count against your credit report. Along with checking your credit score, it’s a good idea to get copies of your credit reports from the three major credit bureaus. Then, you can dispute any negative information on your report that’s not correct.
When Are Credit Scores Updated?
Your credit scores are updated whenever a lender or another company reports information to the credit bureaus. That means your score could change whenever you make a payment, apply for a loan, or fall behind on payments. Many people get updated credit reports and credit scores several times per month.
Car and Driver provides extensive research about car loans, credit scores, and other aspects related to buying a vehicle. We can help you choose a car, truck, or SUV you’ll love, and we can also help you find a great auto loan. Even if you have a low credit score or a recent repossession, you can often qualify for an auto loan that suits your needs.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.