Credit Score 101
Let’s start with some basic terminology.
What is a credit score?
Your credit score is a number that helps lenders understand the amount of risk they’re taking on by loaning you money. Your score influences the credit and terms that lenders make available to you.
“It is a number that summarizes credit risk, based on a snapshot of a credit report at a particular time,” says myFICO.
What does FICO mean?
You’ve seen “FICO” a couple of times now. Used by 90% of top lenders, FICO scores are the most widely used credit scores. They were first introduced by the Fair Isaac Corporation in 1989.
Your FICO score is based on five categories of information in your credit report:
- Payment history (35%): Have you paid past credit accounts on time?
- Amounts owed (30%): Do you currently owe money on your credit accounts?
- Length of credit history (15%): A longer credit history can sometimes increase your FICO score.
- Credit mix in use (10%): FICO scores will look at your mix of credit cards, retail accounts, installment loans, and mortgage loans.
- New credit (10%): Avoid opening several credit accounts in a short period of time. Research shows that doing so represents a greater risk — especially for people who don’t have a long credit history.
What’s a good FICO score?
FICO scores range from 300-850. In general, the higher the score, the lower the risk. Credit applicants with higher scores generally receive the most favorable interest rates from lenders, whether they’re applying for a car loan, mortgage, or credit card.
Request your FICO credit score for free to see where you fall on the credit spectrum.
Credit Scores & Car Loan Interest Rates
Now you’re probably thinking, “All of this is great information guys, but what does it mean for me? I just want to get a car loan.”
We hear you. Unless you can pay cash for a new or used car, you’re going to need financing. Auto lenders use your FICO credit score to determine loan eligibility and interest rate just like any other lender.
According to Experian via Bankrate, the average credit score needed to buy a new car is about 714. The average score to buy a used car is 655. If your score is lower than these averages, it’s certainly not impossible to buy a car. You may just have to accept a loan with a higher interest rate.
You see, your FICO score is especially important when it comes to car loan interest rates. A lower interest rate can help you get a low monthly payment, but also help you spend less over the course of your loan. Check out a sampling of average car loan interest rates below, per Bankrate.
Your car loan interest rate may differ from these averages. If you know your general score range, you can estimate your auto loan interest rate using myAutoloan’s Interest Rate Calculator.
Note that simply applying for a car loan likely won’t hurt your credit score in the long term. Reporting agencies recognize that when people shop for an auto loan, they’re going to compare multiple loan options. With this in mind the top three credit reporting agencies (Equifax, Experian, TransUnion), for the purpose of credit scoring, roll multiple auto inquiries into one inquiry on a continuous, 14-30 day cycle.
Boosting Your Credit Score for a Better Loan Interest Rate
The simple truth is, the better your FICO credit score, the better loan interest rate you can secure. There’s always room for improvement, even if you have a score of 700.
Follow these simple tips to start improving your credit score ASAP:
- Pay your bills on time
- Maintain a low balance on your credit cards
- Do not max out your credit cards
- Maintain a long credit history
- Apply for credit sparingly
- Keep spending and payment habits consistent (and good!)
You Don’t Need a Perfect FICO Score to Apply for an Auto Loan
Don’t let your credit score get in the way of a car loan. Everyone needs a means of transportation! There’s a good chance you can still secure financing, even if your score isn’t perfect. After a year or so of healthy credit habits, you can always apply to refinance at a lower interest rate, too.
Download myAutoloan’s Guide to Better Credit and take the first step towards the credit score you need. Getting your credit score exactly where you want it to be isn’t as hard as you might think. Neither is securing financing. Apply for an auto loan through myAutoloan and compare up to four offers in a matter of minutes. There are loans for almost any credit score!