Unless you plan on purchasing a vehicle in all cash, your credit score is one of the most important factors in securing financing on a new or used car. Your credit score provides lenders with the likelihood that you’ll repay your debts on time.
A solid understanding of your credit score before you head to the dealership can help steer negotiations in your favor when trying to secure an affordable monthly payment. Better credit generally means lower costs. If you’re in good credit standing, you’ll probably get a favorable deal, which means you’ll pay significantly less throughout the loan duration than someone with less than stellar credit.
Auto credit scores differ from those used for mortgage approval and other significant purchases. Keep reading to find out why that’s the case as we explore how auto lenders view credit reports, what’s a good credit score to buy a car and much more.
How Auto Lenders View Credit Reports?
Before you try to find financing for a vehicle, it’s important to have a good idea of your credit standing. However, when an auto lender pulls your credit report, you may notice a discrepancy between the number you saw on a platform like Credit Karma and the number they pulled. That’s because auto lenders use a specialty reporting system called FICO® Auto Score to determine the creditworthiness of a potential borrower.
Similar to your traditional credit score, three main credit bureaus submit information to your FICO Auto Score—Equifax, Experian and TransUnion.
There are a couple of major differences between your regular credit score and your FICO Auto Score. The first being the FICO Auto Score range is generally expanded. The traditional credit score ranges from 300 to 850, while the FICO Auto Score ranges from 250 to 900. That’s because the FICO Auto Score places more weight on your payment history on auto loans and leases rather than missed payment on a credit card or student loans, for example. Additionally, the specialty auto credit report will show any repossessions or auto-loan bankruptcies that may have been previously reported.
Since your credit score can significantly affect your auto loan rates, it’s recommended that you check your credit score regularly for potential inaccuracies. If you’re concerned about the discrepancy between your regular credit score and your auto score, FICO allows you to purchase a complete set of your FICO scores for a monthly fee.
What Is A Good Credit Score To Buy A Car?
The ideal credit score to purchase a car may vary depending on the type of vehicle financing you choose. However, a 2022 report by Experian found that nearly 65% of cars financed in the United States were from borrowers with a credit score of 661 or higher. The report also found that borrowers with a score between 501 and 600 accounted for approximately 15%, while only 2% of borrowers had scores below 500.
Those numbers include financing on new and used vehicles. If we extrapolate the two, the ideal credit score will adjust slightly. According to Experian data, the average credit score for a new-car loan or lease was 736. The average credit score for a used car loan or lease dropped slightly to 669.
While other factors aside from credit scores are considered, your target credit score to finance a vehicle should be no less than 661.
Let’s examine that further. Here is a chart showing credit standings and the potential annual percentage rate (APR) for new and used vehicles.
| Credit Standing & Ranges | Average APR for a New Car | Average APR for a Used Car |
|---|---|---|
| Poor: 300-579 | 14.76% | 20.99% |
| Fair: 580-669 | 10.87% | 17.29% |
| Good: 670-739 | 6.70% | 10.48% |
| Very good: 740-799 | 3.56% | 5.58% |
| Excellent: 800-850 | 2.40% | 3.71% |
Check out Arizona Central Credit Union’s Auto Loan Rates page for the most up-to-date vehicle APRs. Also, play around with our car loan calculator to see how much you can afford to pay for a vehicle.
Factors Other Than Credit To Help You Purchase A Vehicle
It’s important to remember that individuals with major flaws on their credit report get approved for auto loans regularly.
While credit scores are one of the most significant factors for lenders when determining your approval, it’s not the only financial indicator they use. If you believe you have less than stellar credit, try the following tactics when showing up at the dealership’s finance office.
Leverage a bigger down payment
A larger down payment not only may help offset your low credit score, but it will greatly help reduce your monthly payment. Depending on the lender you choose, a significant down payment may help bring down the interest rate as well.
Bring documents highlight financial consistency
If your credit score is not up to snuff to purchase a vehicle, you may want to consider bringing other documents that indicate your financial stability. That’s because there is a chance they may view you as a less risky borrower. Some documents you may want to include are your most recent pay stub or proof of address to show how long you’ve lived at your primary residence. Any documents that show you’re financially stable may help increase your approval odds.
Show up to the dealership with your own financing
While financing through the dealership may be a convenient option, it’s recommended to shop around to a few lenders to receive an auto loan preapproval. That’s because the dealership tends to markup their APRs. When you show up at the dealership, you can show them the preapproval letter to see if they’re willing to match it. A preapproval letter can also help you during the negotiation process.
Improve Your Credit Score Before Car Shopping
If you believe your credit score isn’t where it needs to be to purchase a vehicle, we recommend implementing strategies to improve your credit score before you start car shopping. Some strategies include:
- Ensure you’re paying bills on time: The easiest way to improve your credit score is by consistently paying your bills on time. The credit bureaus aren’t alerted of a missed payment until 30 days after. You should be good if you pay within that time frame.
- Keep your credit utilization ratio low: Your credit utilization ratio represents the amount of credit used versus the amount you have available. Financial experts believe you shouldn’t exceed more than 30% each month to improve your credit score.
- Don’t close credit accounts: There’s a popular misconception that closing a credit account improves your credit score. In fact, it does the opposite because it affects the length of credit history, which accounts for 15% of your score’s calculation.
Finance Your New Vehicle With Arizona Central Credit Union
Credit scores are one of the most important factors lenders use to determine your auto loan approval odds and if you’ll receive favorable rates.
If you’re ready to purchase a vehicle and are looking for a financing partner that offers low rates, consider applying for an auto loan with Arizona Central Credit Union. Visit our Auto Loans page for more information on our rates and to apply today!
