New or Used? How Your Credit Affects Your Next Ride.
Before perusing sticker prices or dreaming of after-market add-ons, experts suggest making an all-important pit stop. Delve into the three numbers that can either rev up - or stall - an auto purchase: Your credit score.
“Unlike a vehicle’s price, your FICO or credit score can be the most influential number in the transaction,” says Scott Stevenson, founder and CEO of eliminateidtheft.com.
The Weight of Your Number
Your credit scores carries a lot of weight at the dealer and drives the direction you should start looking for a vehicle. “Lenders use credit scores to gauge their potential risk and the likelihood the loan will be repaid,” explains Dan Danford, MBA, CRSP, principal and chief executive officer, Family Investment Center, St. Joseph, MO. A low score is interpreted as being too risky, and in some cases, means you won’t qualify for the amount needed to purchase a new car. “So you’ll have to find a less expensive car, which often means buying used,” he adds.
Those three numbers even impact how long it will take to complete your purchase. “A score of 620 or lower might require a car dealer to look for financing at several banks,” Danford explains. And that equates to several hours - or in some cases days - waiting to close the deal.
According to The United States Public Interest Research Group, a consumer protection group, 80% of credit reports have some type of mistake, and 25% contain a serious mistake. And, the Consumer Federation of America conservatively estimates that 40 million consumers are at risk of being misclassified by their credit report. To correct costly errors like accounts you closed but continue to report as open, balances reported as past due that are current, etc. the first step on the car shopping circuit is checking your credit.
Be thorough. You have three credit scores; one with each of the three major credit bureaus (TransUnion, Equifax, and Experian). And Stevenson says those scores aren’t necessarily all the same. “Some creditors report to all three, but different creditors report to different bureaus,” explains Stevenson. So, one bureau might have more - or less - information than the other.
The Magic Number
If you’re eying a new car, you’ll need a credit score of at least 520. But, to qualify for what Stevenson calls “an average interest rate”, between 5% to 7% you’ll need a score of at least 720. “The lower your score, the higher that rate climbs,” he says.
Credit scores over 720 can attract promotional interest rates as low as 0.9%. While a score that’s between 720 and 620, can expect rates of 7% to 10%. Depending on the lender, credit scores that fall between 620 and 520 often require “special” or “subprime” financing which usually carries a premium rate of 19% to 24%.
Stevenson says the numbers are a bit more flexible for used car transactions. Because the size of the loan is usually lower, lenders will work with lower scores. “I’ve seen subprime lending with scores lower than 500,” says Stevenson.
However, new or used, your credit drives the amount of cash you’ll need to cough up for a down payment. “Lenders will only extend themselves “so far” based on credit scores. And that can translate into a consumer with a score of 620 or lower needing to come up with more money to complete the purchase.” That additional amount can add up to as much as 20% down because Danford says lenders want the assurance you’re invested in the transaction. “The bank, or lending institution wants assurances that a loan will be paid off. And a sizable down payment reduces the chances a consumer will default on the loan,” he notes.
Rev Up Your Score
Regardless of your score, it’s a good idea to aim higher. “The higher the number, the more money you’ll save at the dealer,” says Stevenson. To give your credit score a boost:
- Be Prompt. Make credit card and other card payments (that appear on your credit report) on time. One missed or late payment can drop your score by as many as 10 points.
- Cut Back. Maxed out accounts send the message you’re in financial trouble. Reduce your credit card balances to no more than 50% or less of the available credit.
- Clean up. Dispute any erroneous or duplicated negative information on your credit report.
- Hold out. Every new credit account application can shave 5 or more points off your score. Wait to apply for new credit accounts until after you’ve secured and closed on an auto loan.
- Balance your credit. You need one car loan, one mortgage and 3 to 5 credit cards in good standing (current and not past due in the past 6 months) to have the right mixture.
While you’re kicking tires, ask the dealer which bureau they use to check your credit. “That will give you an understanding of what score they’re going to see,” says Stevenson. And of what number requires the most immediate attention.