Credit Scores – How Important Are They for Interest Rates and Car Loans
Auto Loan Expert
If you’re interested in buying or leasing a new vehicle, you’re probably thinking a lot about your credit scores. Are credit scores all that matter when you’re buying a car? Are there other concerns you should have? Get all the facts here.
Learn About Credit Scores
Anyone who has gotten financing to purchase a car knows the important role credit scores play in the car buying process. In fact, they’re often the deciding factor in determining not only eligibility for getting the loan but also the amount of interest you’ll end up paying. However, many don’t realize that there are different credit scores and different credit reporting agencies.
The three main credit reporting agencies are TransUnion, Experian and Equifax. Although their scores are similar, they are seldom the same, and you never know which agency the car dealership is going to use.
In addition to the different agencies, there are also different credit scores. Your FICO score is based on your overall credit. This score is based on the following things followed by the percent they play in generating the scores.
- Payment history – if you’ve paid your debts on time – 35%
- Debt amount – how much you owe – 30%
- Credit history – how long you’ve had your accounts – 15%
- New credit – any new accounts just opened – 10%
- Type of credit – mortgages, car loans, credit cards, etc. – 10%
Car dealerships often use a different credit score knowns as the FICO auto-enhanced credit score. While the regular FICO score comes from how you pay all your debts, the auto-enhanced credit score is based solely on how you’ve handled auto loans. It gives auto dealers and lenders a better idea of how credit worthy you are in terms of auto loans.
If you’re planning to purchase a car with financing in the near future, get a copy of your credit report. You can get a free credit report once per year from any of the agencies. Having your own copy allows you to check for errors and have them corrected. You can also see what type of debts are listed on the report. You may have an old unpaid debt that you thought was paid.
If you have several small debts, it’s beneficial to pay as many off as you can or pay enough to lower the balances. Both of these things will increase your credit scores. Any errors on the report can also be corrected by contacting the credit reporting agency. Keep in mind that it may take at least a month for the changes to affect your scores so get your report prior to visiting the car dealership.
Is Credit All That Matters?
Although we’ve determined that your credit plays an important role in financing, it’s not everything. Any car dealership or lender is going to want to know that you can make the payments on time. The best credit scores in the world won’t help if you have no income or insufficient income. Be prepared to show proof of employment and income.
What about No Credit?
If purchasing a car is your first attempt at financing, you may have a problem. Some lenders may still be willing to take a chance on you but most like to see some credit history. Consider getting a credit card a couple of months prior to car shopping so you have time to make a few payments.
Most credit reporting agencies take at least a month to report so you’ll need that much time to get a credit history. A consumer with no credit will pay a higher interest rate than one with good credit.
Can I Get a Car with Bad Credit?
If you go to the right dealership, you may be able to get car financing even if you have bad credit. However, be prepared to pay a higher interest rate. If there is a legitimate reason why you have bad credit, bring any documentation you can to the lender. Again, it’s advantageous to get a copy of your credit report a few months prior to car shopping so you can possibly get current on your accounts and get your scores a little higher.
Buy or Lease?
Between the many fantastic lease offers available and the high prices of cars today, many are choosing to lease their vehicles. However, leasing is not for everyone. There are advantages and disadvantages to leasing. If you don’t put many miles on in a year and the deal is right, leasing might be for you.
You get to drive a new car for a couple of years and don’t have to worry about regular maintenance during that time. If you really like the car, you have the option to purchase it at the end of the lease. The biggest deciding factors should be the additional fees that are due at signing and at the end of the lease. Some dealerships offer 0 percent financing and no additional fees to eligible buyers, which makes can make leasing a good option.