There’s more to buying a car than just finding a model you like driving it off the lot. You have to figure out a way to pay for it, and your credit score plays a huge role in how you do that. Most buyers need to take a loan out when they purchase either a new or used vehicle. Your credit score is one of the most important criteria lenders consider when deciding whether to loan you money and what terms and interest rate to offer.
Knowing your credit score before you dive into the car-buying market will give you a good idea about whether you’ll qualify for a loan, as well as what interest rate you can get. With that information, you can set your car-buying budget.
Nearly everyone can qualify for a car loan and buy a car, no matter their credit score. However, the lower the score you have, the more expensive buying a car will be. Buyers with extremely low scores can easily find themselves falling prey to predatory lenders, and will need to consider whether having a car is worth the high price of its financing.
Here are the car loan credit score topics we’ll cover in this guide:
- What Credit Score Do I Need to Buy a Car?
- Can You Get a Car With Bad Credit?
- What Credit Score Do I Need to Get a Good Deal on a Car?
- What Is a Credit Score?
- Ranges of Credit Scores
- Why Is a Credit Score Important When Buying a Car?
- Where Can I See My Credit Score?
- How Do I Improve My Credit Score?
- Credit Scores and Car Insurance
- Credit Scores and Car Leasing
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You can get a car loan and buy a vehicle with nearly any credit score, but your chances of being rejected – or charged a punitive level of interest – are much higher if you have a low credit score. According to our latest auto loan rate report, shoppers with scores above 700 qualify for some of the lowest interest rates in the marketplace. These buyers are considered to have good or excellent credit since they're near the top of the credit score range, which spans from 300 to 850 points.
Shoppers with scores in the 650 to 699 range can expect rates more than double what top tier borrowers receive. Those with scores in the 450 to 649 bracket are looking at interest rates more than three times the best rates available. Deep subprime borrowers with scores of 449 or below can expect to pay a whopping five times the rate of those with good credit. Deep subprime borrowers should not be surprised if they’re quoted rates of 20% or higher for either a used or new car loan.
Some lenders in the deep subprime marketplace charge even higher interest rates to desperate consumers.
Yes, you can get a car even if you have bad credit – but you’ll pay a high price to do so. It’s critical that you take steps to ensure that you don’t put yourself in a debt trap, which could further hurt your credit, put you into bankruptcy, or cause you to lose your car.
The best way to protect yourself from falling into a spiral of debt is to get pre-qualified for an auto loan by a reputable lender before you step foot into a car dealership. You want a loan offer with affordable monthly payments, the shortest possible term, a reasonable interest rate, and a loan-to-value ratio that shows the vehicle is worth more than you owe on it.
Having a substantial down payment will sway some lenders to be more willing to loan you money. If you're only borrowing $15,000 toward a $20,000 car, you're more attractive to lenders than if you're borrowing the full $20,000 (or more) toward that same car.
Here’s a secret of the lending industry: Auto lenders don't want to loan out all of their money to top-tier – or "super prime" – borrowers. There's a lot of competition for those borrowers and interest rates are low for shoppers with high credit scores, so lenders don’t make a lot of money off their loans. Lenders understand that they can make more money off a loan with a higher interest rate, as long as they’re confident that the borrower will pay the money back. You want to be the borrower that convinces the lender that you’re responsible enough with credit that the loan will be paid back on time.
Where Do You Get a Car Loan With Bad Credit?
An excellent place to find an auto loan if you have higher-risk credit is with a smaller lender, such as a credit union or community bank, where you can sit down face-to-face and explain your financial situation. Such personalized service is more difficult to find at large national banks. A good lender will look at where your finances are weaker or stronger, then tailor a financing plan to meet your needs while minimizing their risk.
When you have nonprime credit, working with a car dealer to get an auto loan can be risky. This is especially true if you don’t already have a preapproval from an outside lender. There are a couple of reasons why: First, they want to sell you a car, and finding you an auto loan is one way of getting you to buy. They’ll often be more interested in just finding you something you can qualify for than getting you a great financing deal, or getting you into a loan they have confidence you can pay back. Second, dealers make money from arranging financing for their buyers, and the way they’re compensated varies from lender to lender. They may offer a financing package that makes them the most money, but isn't a good deal for you.
When you arrive at the car dealership with a preapproved loan, it gives them a benchmark to beat if they want to arrange an auto loan for you themselves. It also reduces their ability to mix the loan, the price of the car, and the value of your trade-in into one confusing jumble of numbers.
What if You Don’t Qualify for an Auto Loan?
If you apply for a car loan and your application is not approved, it can be frustrating and depressing. It can prevent you from getting the car you want, or from being able to buy at all.
In the long run, however, a declined loan can be a good thing. What a rejected application means is a lending professional does not think you’ll have the ability to make on-time payments or pay off the loan. Preventing you from getting over your head in a loan you can’t afford can save you from going deeper into debt, having an even lower credit score, losing your car to repossession, or even going into bankruptcy.
When a loan is declined, auto lenders must provide you with the reason why you did not qualify and a copy of the credit report that was used to make the decision. When you study those reasons, you can work to improve weak areas in your credit or look for a cheaper car with a loan you can afford.
Stay On Budget
With higher interest rates come larger payments. Some buyers with lousy credit are enticed by advertisements or dealer salespeople offering to lower their monthly payments by stretching out the length of the loan. What they don’t tell you (other than in the fine print) is you’ll be paying dramatically more in interest over the term of the loan.
In general, the longer the car loan, the worse the deal and the more hazardous to your financial future. Not only do longer loans come with even higher interest rates, but the chances you’ll owe more for the car than it’s worth are substantially higher. If the loan exceeds the length of the vehicle’s warranty, you can be faced with the prospect of having to pay both your car payments and expensive repair bills at the same time.
A better idea is to find a car you can afford with a four- to five-year car loan. A little sacrifice today can mean huge future benefits in terms of money savings and financial stability.
To get an auto loan without a high interest rate, our research shows you'll want a credit score of 700 or above on the 300- to 850-point scale. That's considered prime credit, and lenders don't have to price much risk into their rates.
The absolute best auto loan interest rates are reserved for borrowers with scores of 750 or higher. These super prime borrowers represent little risk to lenders. They almost always make their payments on time, and they pay their financing off as agreed in their loan documents. Of course, bad things happen to even the best borrowers, so lenders price some risk into the interest payment.
APR Range: 1.99% - 27%
Loan Term: 24 - 84 months
Loan Range: $8,000 - $100,000
At least 18 years old, resident of the U.S. (except Alaska and Hawaii), with min. income of $1,800/month and min. credit score of 500
Max mileage of 125,000 miles, 10 years old or newer
myAutoloan presents up to four offers from a variety of participating lenders based on your specific loan requirements, offering a wide variety of choice and selections.
APR Range: 3.34% - 17.49% (AutoPay Discount of 0.50% also included)
Loan Term: 24 - 144 months
Loan Range: $5,000 - $100,000
Must have good to excellent credit*
LightStream caters heavily to applicants with very strong credit scores, offering a streamlined application process and a Rate Beat program that guarantees they'll beat any other qualifying offers an applicant receives.
APR Range: 3.99% - 10.08%
Loan Term: 36 - 72 months
Loan Range: $4,000+
$1,800/month minimum income requirements, resident of the U.S. (except Alaska or Hawaii)
Limited to vehicles available through the Capital One network of dealers
Capital One offers a pre-qualification, which allows you to take your offer to any participating dealer within 30 days.
APR Range: 4.29% - 24.99%
Loan Term: 48 - 72 months
Loan Range: $4,000+
At least 18 years old
Limited to vehicles available through the Chase network of dealers, no older than 2008
After your application is approved, Chase will send the information to the dealer you choose. The offer is good for 30 days.
|Bank of America|
APR Range: 3.49+%
Loan Term: 12 - 75 months
Loan Range: $7,500 - $100,000
At least 18 years old (19 in Alabama or Nebraska) U.S. resident
Max mileage of 125,000 miles, 10 years old or newer, valued at $6,000+, plus additional restrictions
Bank of America Preferred Rewards clients can receive an interest rate discount of 0.25-0.50% depending on their tier at the time of applying for an auto loan.
Disclaimer: All information provided here is based on Annual Percentage Rate estimates from the websites of the individual lenders on 12/18/2018. It is not a binding or guaranteed loan offer. Individual auto loan rates will vary.
Notes: In compiling this data, we used new-car purchase rates for Virginia.
*To meet LightStream's standard for good credit, you must have several years of credit history with a variety of account types, including credit cards, installment debt (vehicle loans), and mortgages. LightStream also prefers to see few, if any, delinquencies and a history of savings, evidenced by things like deposit accounts and manageable revolving credit card debt. You'll also want to provide proof of stable and sufficient income to repay current debt obligations as well as any new loan with LightStream.
Credit Scores and Car Deals
When they want to improve the sales pace of specific models, automakers offer special incentives. They include deals with low interest rates and zero percent financing. Most of the best deals can be found on new cars, though there are frequently used car deals with below-market interest rates available on certified pre-owned vehicles.
To qualify for these money-saving offers, you need to have a top-notch credit score. That means that even a score of 750 may not be eligible. Car deals are another reason you want to check your credit scores and the credit history behind them well before you're in the market for a new car. A difference of just a few points may be the difference between getting a car deal that saves you thousands of dollars and missing out on the offer altogether.
You can find the best new car incentives in the marketplace on our new car deals page.
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We’ve talked about the credit scores you need to qualify for an auto loan, but what exactly is a credit score? A credit score is a numerical representation of the data in your credit report. Auto lenders use credit scores to determine how likely you are to repay a car loan. Scores are generally measured on a scale from 300 to 850. A high number means you have excellent credit and are likely to pay as agreed. A low score indicates past credit issues and tells lenders you may have a problem paying off your vehicle. Borrowers with low credit scores can expect to pay more for financing, as lenders price their additional risk by raising interest rates for borrowers with lower scores.
It's a common myth that you only have one credit score. In fact, most people have many ratings, as the three major credit bureaus – Equifax, Experian, and TransUnion – each use have slightly different scoring models. Some independent companies also create scores, and not all of them use the same 300- to 850-point scale. The FICO score is the best-known scoring model, and it's named for the company behind it: Fair, Isaac, and Company. When auto lending, your lender may use an industry-specific score, such as a FICO Auto Score, VantageScore, or a combination of several credit scoring models. In general, all of your credit scores will be similar to one another, so you shouldn’t worry about the scoring model in use.
As we mentioned earlier, credit scores are based on the information in your credit reports. They include information about your payment history, how much credit you have available, how much debt you have relative to the amount that is available to you. Each model is slightly different, and many are proprietary, but here's an example of the components and weight using publicly available information about the FICO scoring model.
Payment History (35% of your credit score)
Whether you make payments on loans and pay other bills in full and on time is the greatest single factor credit reporting agencies use in determining your credit score. Most lenders, student loan providers, and credit card companies report your information. You don’t necessarily have to pay off your credit cards each month, but you at least have to pay the minimum amount due.
Utilities and some other vendors don’t typically report to the credit bureaus unless you’re so far behind that your account is turned over to a collection agency. Many lenders won’t report you as past due immediately, though being more than 30 days late will likely create a black mark on your credit reports and damage your score.
Consumers who have become so delinquent on past loans that their vehicles were repossessed will have that fact reported. Defaulting on a loan of any type will have a massively detrimental effect on your credit history.
Since many younger consumers don’t have a long history of servicing loans, the credit bureau Experian has created a service called Experian Boost. It links to your phone, cable, and utility bills, using them to assess your track record of paying bills. Users of the free program add an average of 10 points to their FICO credit score.
Credit Capacity (30% of your credit score)
Your credit capacity is comprised of three factors. They include the amount of credit that has been extended to you (your credit limits and loan balances), the amount of that credit you are using, and the percentage of the credit that is available to you that you are using.
The percentage is called your utilization of credit. Lenders like to see this number below 30%, and lower numbers are better. A credit utilization of 0%, however, can tell lenders that you don't have experience in managing debt. Your utilization of credit can vary during the month as you charge items on your credit cards and pay off their principal balances.
Length of Credit (15% of your credit score)
In addition to the amount of credit you have, your credit score also reflects the amount of time you have honored your debt payment commitments. The longer you have responsibly managed credit, the higher your score will be.
If, for example, you’ve had the same credit cards for years, it will reflect positively on your score. On the other hand, if you’ve recently opened one or more cards, your score will be knocked down several points. The same goes for making a major purchase such as a house or car, after which you will likely see a dip in your score for several months before it recovers. As your existing credit lines mature and you have a track record of making on-time payments, your score will potentially climb higher than it was before you took out the loan or added the credit card.
New Credit Inquiries (10% of your credit score)
When credit reporting agencies see an indication that you are about to take on more debt, they'll knock a few points off your score in anticipation of you having a higher amount of debt. They judge you're about to add more debt when you start applying for new lines of credit – such as car loans, mortgages, or credit cards – and the lenders pull credit reports.
Such inquiries triggered by lenders are called “hard pulls” on your credit report. If you make several for the same purchase over a short time – such as when you’re shopping for a car loan – credit bureaus will recognize it as a single instance of new debt. Extend your shopping over more than a few weeks, and you may start to have your score dinged by multiple hard pulls.
When you check your credit score yourself or companies check your credit for marketing purposes, it's called a "soft pull," and it does not affect your score. It’s only when potential lenders, with your permission, check your credit history that you'll get a hard pull marked on your report.
Credit Mix (10% of your credit score)
Credit reporting agencies look for a mix of different types of accounts in your credit history. They want to see a blend of revolving credit (such as credit cards) and installment credit (such as auto loans and home mortgages). The preferable mixes of different types of credit vary by the scoring model used, and aren’t publicly disclosed by credit reporting agencies.
What Is Not Included in a Credit Score?
There are several things you'll find on a credit report that don't affect your credit score. Factors like where you live, your occupation, some types of credit inquiries, and your salary are not included. Of course, your lender will ask for your salary on any loan application so that they can determine your debt-to-income ratio. That ratio is another critical factor lenders consider when making car loan decisions.
While some of it may appear on your report, demographic information, such as age, race, gender, or marital status is not used in determining your score. It is not legal for a credit reporting agency to consider whether you receive public assistance when assigning a rating.
In general, information about utility, cable, or cell phone bills does not count for or against your score, though opting for the Experian Boost product mentioned in an earlier section can bring those payments into the mix.
The names different companies use to describe various credit tiers vary, as do the score ranges they use in their categories. We’ll explore the names Experian uses in their automotive finance market analysis to explore the categories. The tiers range from deep subprime (poor) to super prime (excellent).
Deep Subprime (300-500): Car buyers in the lowest credit tier will find it difficult to get a car loan. If they can get one, they'll pay extremely high interest rates. Having a score in this range tells lenders there is considerable risk in extending financing, and there's a good chance the loan will not be repaid.
Deep subprime borrowers should expect lenders to take steps that reduce their risk. Beyond astronomical interest rates, they should expect short loan terms and requirements for significant down payments. They may outfit the vehicle with a tracking device or a system that can disable the car, making repossession easier and making it impossible for a borrower who has defaulted on the loan to drive it.
Unfortunately, some desperate deep subprime consumers are targeted by unscrupulous lenders who create debt traps that are difficult or impossible to escape. Before you purchase a car from this type of lender, it is critical to consider whether you really need a vehicle badly enough to risk your financial future. A better plan is to work on improving your credit so you can get financing with less egregious terms.
About 3.1% of auto loans originated in the third quarter of 2019 were in the deep subprime category, according to Experian.
Subprime (501-600): Buyers in the subprime category may find it a bit easier to get an auto loan than those with deep subprime scores, but it still won’t be easy or cheap. Responsible lenders in this category minimize their risk by requiring significant down payments and short loan terms. They’ll also charge high interest rates.
There are many lenders and some car dealerships that specialize in loaning money to subprime car buyers. Before shopping for financing from them, though, you should talk to a local credit union or community bank. These smaller institutions may be able to offer you a loan with more reasonable terms and better rates than you’ll find at the specialized lenders.
Subprime borrowers, like deep subprime shoppers, should be wary of predatory lenders who take advantage of their desperation and, perhaps, lack of financial literacy. Some states have great consumer protections for borrowers, while others protect lenders and allow aggressive collection tactics.
Some small banks and credit unions offer “fresh start” programs to borrowers with bad credit. If your credit was damaged by a one-time event, such as a medical or family emergency, their personal touch might allow them the flexibility to customize a loan for you.
In the third quarter of 2019, subprime buyers had some of the highest loan payments, despite having some of the lowest initial loan balances in the industry, according to Experian. Subprime lending accounted for about 18.1% of the market in the same period.
Nonprime (601-660): Car buyers in the nonprime category may not pay the highest interest rates in the marketplace, but they shouldn’t expect the lowest, either. In most cases, their credit scores will be too low to qualify for special financing deals offered by automakers.
Nonprime buyers should not have too much trouble finding a loan. Like subprime buyers, some of the best loan interest rates and terms will be found at smaller institutions with the flexibility to look at your overall financial picture, instead of just the credit score. Some larger lenders, such as national banks, have rigid loan policies that don’t allow for special circumstances.
The category accounts for about 19.9% of lending, according to Experian.
If you find yourself near the top of the nonprime category, it's a good idea to put your car purchase off for several months while you try to improve your credit. By doing so, you may be able to lower your interest rate by 3 to 5%, according to Experian. That's a significant enough difference to save you thousands of dollars over the term of your car loan.
Prime (661-780): If you are in the prime or super prime categories, you’re generally considered to have good to excellent credit. You can expect to approach some of the best loan rates in the marketplace, including some automaker incentive offers. You’ll be able to get offers from a variety of lenders, often with one application at a website that shops your loan to multiple lenders. Instead of merely looking for a lender who will agree to do business with you, prime buyers will likely have the luxury of choosing from multiple offers.
Nearly 40% of buyers fit into the prime credit classification. Beyond the benefits you receive when looking for a loan, having prime credit opens up the possibility of auto leasing and helps lower the price of your auto insurance policies.
When you have prime credit, you'll likely be inundated with credit card offers in your mailbox and email. While the temptation to get more credit can be strong, it's smart to be careful. Applying for credit cards will cause a "hard pull" of a credit report, which lowers your score by a few points. Adding additional amounts of credit will also lower your score, especially if you go on a shopping spree and carry balances on your new cards.
In short, once you get to the prime credit category, you need to protect your status by continuing to be vigilant with your credit choices and prompt with your payments.
Super Prime (781-850): Shoppers with a credit score that is considered super prime have access to the lowest interest rates, most generous auto loan terms, and special low-interest financing deals offered by automakers. According to Experian, they earn interest rates that are about 1% lower than even prime borrowers, and tend to have lower car payments than borrowers in any other credit class.
Because lenders believe there is little risk in loaning money to them, super prime borrowers tend to have credit card, auto, and other lenders falling all over each other to get their business. They’ll receive steady streams of solicitations even when they are not in the market for a loan. Getting a lease is easy for super prime borrowers, and they’ll qualify for most manufacturer-subsidized lease deals.
Earning a super prime credit score has nothing to do with one’s occupation or salary. It is earned by managing credit wisely and making every payment on time. Some believe that having no loans, credit cards, or a mortgage will get them a stellar credit rating, but that’s not generally the case. Credit bureaus generally reward consumers those who take out reasonable amounts of credit and handle it responsibly.
A credit score is one of the primary factors a lender looks at when someone applies for a car loan. Now that we’ve explored what goes into a credit score and how borrowers are ranked, we’ll talk about why knowing your credit score, understanding what’s behind it, and working to earn the highest score possible is so critical to new and used car shoppers.
To put it simply, the higher your credit score, the lower your interest rate will be, and the less restrictive the loan terms will be. Having a high credit score can save you thousands of dollars on the total cost of your financing. Because of the more generous loan terms offered, borrowers with high credit scores will generally have less chance of owing more on their cars than the vehicle is worth.
To illustrate how credit scores will affect how much you pay on a car loan, let’s look at an example. We’ll assume you’re buying a $30,000 compact SUV and are making a $3,000 down payment. Using Experian’s average loan interest rates from the third quarter of 2019, we see that, on average, a deep subprime buyer would pay an average interest rate of 14.3%. Using an auto loan calculator, we can determine that each monthly payment on a five-year (60-month) loan would be $632. Over the life of the loan, this borrower would pay $10,947 in interest on the loan. The true cost of your $30,000 SUV would be $40,947.
The same buyer with a credit score in the nonprime category could expect an average interest rate of 7.77%, which would give them a monthly payment of $544, according to our auto loan calculator. They would pay a total of $5,670 over the term of the loan. The total cost of their car would be $35,670.
A super prime borrower with the same loan would, on average, pay 4.01%. Their monthly payment would be $497, and they would only pay a total of $2,842 in interest, making the total cost of their SUV $32,842. The difference in the amount of interest a deep subprime and super prime buyer would pay is more than $8,000. If they were buying a used car, rather than a new car, the difference would be even more substantial, as the deep subprime buyer would, on average, have an interest rate of 19.72%, compared to the super prime buyer’s 4.66%. Of course, these numbers will fluctuate as interest rates slowly shift over time.
The above example assumes the deep subprime borrower would be allowed by their lender to take out a five-year loan, or make only a 10% down payment. In many cases, they would be required to take a shorter loan and put more money down.
When you make a payment on an auto loan, a portion of each payment goes toward interest, while the rest pays down the principal balance. If you have a high interest rate loan, much more of each payment goes toward interest than if you have financing with a low interest rate. With the high rate loan, less goes toward principal, which can make it challenging to keep pace with the car's depreciation. When your principal payments don't keep up with depreciation, it's easy to get to a point that the car's value is lower than the amount you owe on its loan. It’s called having negative equity, or being upside-down or underwater on the loan. If your car is stolen or declared a total loss after an accident, the check from the insurance company won’t be enough to pay off the upside-down loan.
Access to your credit score and the credit reports that drive them has never been easier. In many cases, credit card companies offer access to your score as a perk of having the card. If yours doesn’t, you can head over to a site such as CreditKarma.com, which will provide your score for free, in exchange for the opportunity to market its partners’ loan products to you. Some sites, including MyFico.com, will only supply your score if you purchase a product from their website.
To see your score, you'll have to enter a substantial amount of personal information, including your social security number. While it is necessary, it’s also a good reason to stay with reputable websites and avoid public computers and public Wi-Fi hot spots when viewing your score or credit reports. Some sites offering the ability to view your credit scores or reports require you to purchase or subscribe to credit monitoring services. Be sure to read our U.S. News Money guide to credit monitoring services before you buy.
Each year you are entitled to view your credit reports (not scores) from each of the three major credit bureaus for free, with no strings attached. The only site authorized to provide them is AnnualCreditReport.com. Beware of similarly sounding sites that will charge you to access your reports. The full credit reports you receive from annualcreditreport.com will not include your credit score, though they will offer to provide it for an additional fee. Fortunately, there are many other places to access it for free, so you can avoid the extra charge.
Prospective borrowers whose loan applications are declined are entitled to a copy of the credit report that was used in making the determination. That's true, whether you were rejected when trying to get preapproved or when the dealership was trying to arrange financing. If a lender fails to provide a copy of the report as legally required, it’s a sign you should be working with a different lender.
While you can destroy your credit score in a matter of months, improving it takes time and patience. Despite advertisements that promise to improve your score in an instant (for a fee), doing it the right way is a long process. That's one reason it's critical to check your credit scores well before you consider buying a new ride.
Let’s look at some of the ways you can hurt your score, followed by ways to improve it.
What Hurts Your Credit Score
It has been said that the first step in getting out of a hole is to stop digging it deeper. There are several ways to stop the bleeding and stabilize your credit score.
Missing Payments: There’s no single thing that damages your credit score more than missing payments on credit cards, auto loans, or other obligations. One way to avoid missing installments is to set up automatic payments from your checking account. Follow them up with reminders on your smartphone to make sure the payments were made each month.
Paying Late: Almost as bad as missing payments is making them so late that you’re reported to the credit bureaus as delinquent on your obligations. Like the solution for missing payments, setting up automatic payments and ensuring that they’ve occurred is the best way to avoid any problems.
If you know you are liable to miss a payment or pay late, it’s a good idea to reach out to your lender or whoever’s payment you’re going to miss. If you’re a long-time customer or have a good reason you’re going to be late, they may offer you forbearance and won’t immediately report you to the credit bureaus.
Opening New Credit Cards: Opening new credit cards shows credit bureaus that the amount of credit extended to you has been increased. It can improve your credit utilization ratio, which is the amount of credit you’re using compared to the amount that is available to you. That benefit, however, will be outweighed if the credit bureaus already feel you have a sufficient amount of available credit. The credit inquiry performed by the credit card company will also drop your score by a few points.
If you think you may have a car loan in your future, don’t open new credit cards.
Closing Credit Cards: If opening a credit card is bad for your score, closing one must be good, right? Unfortunately, like opening new credit cards, closing credit cards can also damage your credit score. One of the ratios used in setting your score is the amount of credit you’re using compared to the amount you have available (your credit utilization ratio). Closing a credit card reduces the amount you have available, and raises the percentage you are utilizing.
Are you planning on getting a car loan? Don't start closing your credit cards.
Maxing Out Your Credit Cards: Running your credit cards up to their maximum allowable balances raises your utilization of credit and lowers your credit score. Experts suggest never using more than 30% of a credit card’s max if you want to reduce risk to your credit score.
Though it is easy to do, carrying a balance on a credit card is a poor financial decision. Unless you’re carrying a card with a low interest rate promotion, credit cards tend to have some of the highest interest rates in the lending industry.
Too Many Credit Inquiries: When you apply for new credit – whether it’s an auto loan, credit card, mortgage, or some other type of loan – the credit bureaus see it as a signal you’re about to incur more debt. With each application, your score drops a few points.
Fortunately, bureaus also recognize when a flurry of inquiries are related to the same purchase, such as an auto loan. When they see several similar inquiries in a short period, they'll treat it as just one. That's why it is essential you do your car loan shopping in a relatively short time frame. Stretch your shopping over more than several weeks, and you'll see multiple dings on your credit. Do it within a couple of weeks, and you see just one.
Co-Signing on Someone Else’s Loan: In general, co-signing on a loan for someone else is a horrible financial move. You might think you're being nice (and you are), but you're responsible for the entire loan balance if they fail to pay, and that risk is reflected in your credit report. If they make a late payment, it goes on your report just as if you did it. If they fail to pay at all, the lender can come after you for the entire balance, which can destroy your credit if you’re unable to pay.
A safer thing to do is help them out with a large enough down payment so they can qualify on a loan themselves or counsel them to consider a car they can afford without a co-signer.
Burying Yourself in Debt When You’re Young: When you’re young and just starting out, it’s easy to bury yourself in debt. Keep in mind that early financial mistakes, such as running up credit cards with lifestyle purchases, can snowball through the years, leaving you in a credit crisis that can take decades to recover from.
The U.S. News Money team has assembled a guide to recovering from financial mistakes.
What Improves Your Credit Score
While most ways to improve your credit scores take some time, a few – such as correcting errors – take less time than others. Here are several ways to improve less-than-perfect credit.
Correct Errors: Credit reports are complex, comprehensive documents that bring together data from a wide array of sources. Errors are not uncommon, and can affect the interest rates and terms auto lenders offer.
The first step in correcting information that you believe to be erroneous is to contact the credit bureau directly, in writing, and providing any evidence you have that refutes the information in the report. If the error occurs on more than one bureau's report, you'll have to report the error (in writing) to each. The credit bureau will investigate your claim by contacting the company that reported it. They will then let you know what their investigation concluded.
If the credit bureau’s investigation does not lead to the information being corrected, you will need to file a complaint with the company that sent the info to the bureau. If you can prove that the information is incorrect – and the company that sent it does not correct it – they can be held legally liable if it causes you to be declined for financing.
More information about how to correct information on your credit reports can be found on the Federal Trade Commission’s website. If the incorrect information was the result of identity theft, you must take steps to place fraud alerts and possibly a credit freeze with all three credit reporting agencies.
Pay On-Time, Every Time: The most significant factor in your credit score is your history of making timely and complete payments. It’s also one of the easiest places to improve your score. Setting up automatic payments and payment reminders are two of the best ways to ensure you make timely payments.
Pay More Than the Minimum: Credit card companies allow you to pay a minimum amount in principal and interest each month. When you do so, however, paying off your credit card debt will take a long time and cost you a ton of money in interest.
A better idea is to pay as much as you can toward your credit card and other debt balances each month. Doing so lowers both the amount of debt reported to the credit bureaus and your utilization of credit. Start by paying the extra on your highest interest rate debt first. That makes the biggest dent by attacking the principal balance. When that card is paid off, start working down the balance on the account with the next-highest interest rate. It might mean making sacrifices other places in your life, but building your credit score will save you money in the long run.
Don’t close the credit cards once you pay them off, as doing so reduces the amount of credit you have available and raises your utilization of credit ratio. A better idea is to lock them away and never charge another purchase on them. You can close them after you're well into the next credit score tier, and it won't affect the rate you'll pay on a new loan.
Use Credit Accounts: It seems obvious, but you can’t build a credit history without using credit and developing a payment history. Even if you don't believe in using credit cards, it's a good idea to get at least one card. You just need to make a few purchases and pay off the balance each month. Use one with a rewards program and a low annual fee, and you’ll get the bonus of receiving a little back each month from its use. Our guide to reward credit cards can help you find one that matches your needs.
Even if you don't want to make major purchases on credit cards, there are a couple of easy ways to use them that won't build a huge balance. Using a credit card for recurring monthly payments, such as streaming services, will help you build your credit score without too much financial risk. Using a credit card for gas purchases has the side benefit of allowing you to easily track how much you're spending.
Consumers with bad credit aren't excluded from having credit cards. Many financial institutions offer what are called secured cards. Your savings account backs the cards. Responsible use of a secured card can help consumers with bad credit qualify for traditional credit cards.
Make a Plan: Meeting a goal is easier when you have a plan. When you create a budget, you can track your income and expenses. That helps identify places where you can save money. It's essential to include an emergency fund in your planning. Unexpected expenses are a significant cause of financial upset, and can drive even responsible consumers to have lousy credit scores.
Don’t Panic: When you're planning a car purchase, and you discover your credit score is not where it needs to be to get an affordable car loan, the last thing you want to do is panic and start making major changes to your financial life. Making several changes to your credit cards in a short time can have unintended consequences that can damage your credit even more.
A better idea is to put together a systematic plan to fix the problems with your credit. The first step is studying your credit reports and determining the easiest issues to attack, as well as those changes that will have the biggest impact on your score.
Interest rates and loan terms aren't the only things affected by your credit score. In most states, auto insurers can also consider your credit history when determining your premiums. The practice is legal because auto insurance companies can show a correlation between credit scores and claim rates.
According to a study by U.S. News & World Report and Quadrant Information Services that looked at the 10 largest insurance companies in all 50 states, insurance shoppers with bad credit can expect to pay significantly more for car insurance than those with good credit. Based on the study data, consumers with good credit pay an average representative rate of $1,306 per year. Those with bad credit pay an average representative price of $2,318 annually.
To learn more about car insurance rates, discounts, and companies, visit our auto insurance guide.
Having a good credit score is important when you buy a car, but it is critical when you want to lease a vehicle. A credit score that’s good enough to get you an auto loan may not be high enough to get you a decent deal on a lease. In general, leasing a car requires you to have an excellent credit score.
While there are leases available for Subprime buyers, they tend to be very expensive compared to mainstream auto leases. Lessees with imperfect credit may be asked to pay substantially more upfront and pay a much higher money factor (interest rate). The higher money factor will create monthly payments that are considerably higher than a lessee with good credit would pay. Leasing companies may require a substantial security deposit upfront to cover end-of-lease costs.
Even an average credit score won’t meet the credit requirements for automaker subsidized lease deals.