Credit Score to Buy a Car

It’s time for a new set of wheels. But before heading to the dealership, it’s a good idea to understand how much a particular vehicle may cost and what you can afford. If you need to finance the purchase, take the time to learn what credit score to buy a car is recommended. That’s because your credit rating will determine if you qualify for a loan and your interest rate.

What’s the minimum credit score needed to be eligible for a vehicle loan? Read on for details and tips.

What is a credit score?

A credit score is a three-digit number that serves as a measure of your credit risk. This number indicates your likelihood of paying back your debts responsibly and on time. Today, the primary issuer of credit scores is Fair Isaac and Company (FICO), which issues scores between 300 and 850. The higher your score, the more likely you will qualify for auto loan financing at lower costs.

Several factors are used to calculate your base FICO score, including a history of payments (representing 35% of your score), amounts owed (30%), length of credit history (15%), the mix of credit used (10%), and new credit accounts (10%). To calculate your score, FICO evaluates your credit reports issued by the three major credit bureaus: Experian, Equifax, and TransUnion. You can have multiple FICO scores, depending on which FICO scoring model and which bureau’s credit report is used. One of these essential scores is your FICO Auto Score.

How does the FICO Auto Score work?

According to Experian, auto lenders can use your base FICO Score to decide if you are a worthy borrower. But they will look at your FICO Auto Score. The latter takes your base FICO score and modifies it to estimate your odds of punctually repaying a vehicle loan. Auto lenders employ an industry-specific score that weighs auto loans heavily.

If you’ve had one or more auto loans in the past, your credit history with these loans will help determine your FICO Auto Score.

“A FICO Auto Score is an algorithm designed to determine how likely you are to pay back an auto loan specifically. This means your base FICO score – which you see on your personal credit report – may differ from your FICO Auto Score,” says bankruptcy and credit law attorney Eric Klein. “There are currently nine different versions of the FICO Auto Score, each calculated slightly differently. You should find out which FICO Auto Score edition a particular lender or finance company will use and what is factored into that particular score.”

For instance, a FICO Auto Score 9 XT closely considers if your credit card balances have been decreasing or increasing, if you’ve been making more than merely the minimum payments on revolving accounts, and if your credit utilization ratio has been going up or down, Klein notes. This FICO’s Auto Score edition can minimize the damage of certain adverse credit report listings.

What is the minimum credit score to buy a car?

Every lender applies different criteria to borrowers. Some lenders are more flexible than others regarding credit history and credit score. But in general, most auto lenders require a minimum FICO Auto Score of 660.

“A score of 660 is typically the minimum for a car loan with a good rate. You can be pretty certain you’ll secure a loan with the score, but it’s possible to secure a loan with a lower score,” says attorney Ben Michael, director of Auto for Michael & Associates.

Andrew Bryant, a financial expert and founder of Credit Weld, notes that some lenders will approve car loans for borrowers with a score as low as 620.

“But they may charge a higher interest rate to offset the increased risk of lending to someone with only a fair credit score,” adds Bryant.

Per the Consumer Financial Protection Bureau, lenders look at credit score ranges to determine eligibility and interest rate. These ranges are:

• Deep subprime (credit scores below 580)
• Subprime (credit scores of 580-619)
• Near-prime (credit scores of 620-659)
• Prime (credit scores of 660-719)
• Super-prime (credit scores of 720 or above)

If you have a credit score below 660, it may pay to wait things out.

“Work to improve your credit score to the next tier. This may save you serious money on interest,” advises Klein.

Auto loan interest rates by credit score

We looked closely at FICO’s loan savings calculator to estimate how much a loan on a new car would cost based on different credit ratings. In our hypothetical example, according to Kelley Blue Book, we assumed that you intended to purchase a car retailing for $47,148, which is currently around the average cost for a brand new car. The amount we were seeking to borrow was $40,000 over 48 months. Here’s what we found:

Based on this data, the difference between the total interest we would pay with the highest FICO score tier and the lowest tier is an astonishing $11,340. If we had the minimum FICO Auto Score most lenders require, 660, we would pay $7,114 in total interest over the life of our four-year loan – $3,267 more than if we had a score of at least 720.

All of which underscores how crucial it is to have a preferred FICO credit score or to improve a low score.

Consider that interest rates have gone up in recent months. Even if you are in a high FICO score range, you can probably expect to pay an APR of 4.574% today versus the average interest rate for prime borrowers two years ago, which was 2.47%, per Experian.

How to get an auto loan with a low credit score

If you need to finance a vehicle purchase now without delay but have a less-than-desirable credit score, you may be turned down by many lenders and finance companies. Or, they may approve you but charge you a much higher interest rate.

“In this scenario, it’s wise to shop around for loans. Big banks typically don’t have the best options, but there are a lot of private car loan lenders out there who specialize in helping those with poor credit,” says Michael.

If your need is not urgent, it’s better to wait until you can up your score and earn a better interest rate. To improve your score and your likelihood of paying less for a loan, try these tips:

• Pay your debts on time and, if possible, in full. Avoid any late bill payments for at least six months before applying for a loan, and try to pay more than the minimum amount due.
• Don’t apply for any new loans or lines of credit. “Any new credit inquiries will impact your score,” says Strati Papageorge, senior vice president of auto lending for PNC Bank.
• Check your three free credit reports. Review them carefully “to make sure there are no errors that could be artificially dragging down your score. If you find any errors, dispute them with each of the credit bureaus,” recommends Bryant.
• Shop around among several different lenders.” Some lenders offer discounts if you have a checking account with them and sign up for automatic payments for your auto loan,” Papageorge explains.
• Save up more money over time and make a larger down payment. “Putting more money down can help you get a better interest rate, as this shows the lender that you have more skin in the game,” Papageorge adds.