What Credit Score Is Needed To Buy A Car

If you’re looking into buying a car one of the first things you need to look into is your credit score. “What score do I need to buy a car?”, “Is my score high enough?” are the thoughts that run through many of our heads.

There’s a common misconception about credit ratings – nowadays they don’t determine whether or not you get approved for a loan. There’s hundreds of lenders who sell debt to people with low ratings, and even offer guaranteed approval.

This doesn’t mean your financial rating doesn’t matter… More than the price of the car, your financial rating will have a huge impact on the loan terms you get. It’s incredible how much an intangible number can impact your financial situation

If you have a good rating, you will get a low interest rate, but if you have a bad rating, you will get a very high interest rate and end up paying thousands of dollars above the price of the car.

When you finance a car, your loan comes with an interest rate. This interest rate determines the amount of money ABOVE the price of the car that you will be paying. The way most loans work is that you are lent a sum of money, of which you have to make payments to every month. Each month, part of your payment will go towards paying off your principal (the amount of your loan) and another portion will go towards paying interest.

The interest rate you pay is called an APR – Annual Percentage Rate. For cars, these rates usually vary between 2%-8% and sometimes even more. If you get a $30,000 loan at a 5% APR (30,000 x 0.05) you pay 1,500 a year just on interest. Now, if your rate is 1%, you would be paying $3,000 a year. Huge difference.

That’s why it’s important to note that being “approved” for a loan isn’t necessarily something to be celebrated on it’s own. The terms are very important, and your financial rating is the largest determinant of the terms you get.

What’s a good credit rating to buy a car?

Unfortunately, there isn’t a straightforward answer to that question. There’s a few different reporting agencies, including TransUnion, Experian, VantageScore, and FICO. Each of these reports scores differently. Most people’s ratings fall somewhere between 300 and 850. Those numbers may lead you to think that 600 is a good rating, but it’s actually not.

The following is FICO’s categorization of scores

Excellent  – 800+

A score of 800 or above means that you have an excellent credit rating, and will qualify for the best loan terms – including high debt limits and low interest rates.

Very Good  – 740-799

Any score within the above range is a good score. People with a rating within this range will qualify for competitive loan terms.

Good  – 670-739

Scores within this range are within the median of ratings.  If you’re within this range, you should get fair loan terms.

Fair –  580-669

Ratings within this range are below the average and are considered “fair”. If you fall within this range, you may be denied by many creditors, and receive less than ideal loan terms from lenders who do approve you.

Bad  – Below 579

A rating in or under the 500’s isn’t great. If you fall within this range, you may be denied by many lenders, and be given very bad loan terms by the ones who do approve you. You can expect to see APR rates at least 3% higher than the market average.

If your rating is anything below good, you should take a lot of consideration into your decision to finance a car. Remember that it is a huge financial commitment, and that you will have to make payments on that car for years. Even you’re financially able to make the payments now, if you don’t know where you’ll be 3 years from now, it may not be a good idea to get a loan.

Ratings aren’t there just to haunt you and make your life difficult – they actually mean something. They determine the probability you have of being able to pay off debt, and the probability of you going bankrupt.

If your rating is very low, you may want to focus on building and repairing it before you begin looking for a car. Working on repairing your score for one year could have an enormous effect on the terms you get. Even a 0.5% difference in APR rate could mean thousands of dollars in savings.

Repairing Your Credit Rating

Repairing your score may feel impossible, but it’s not! It’s like a diet, you won’t see results from one day to another, but if you’re committed, you will see steady improvement. Here are a few things you can do to increase your credit score to buy a car:

1. Check Your Report
You should know more than just what your score is, you need to study your report. Find out why your score is what it is. Do you carry a lot of debt? Have you made late payments? Do you max or get close to maxing your credit cards? There’s a lot that goes into your rating, so find out what’s bringing your score down, and focus on that! You can check your credit score for free on sites like Credit Karma.

2.Dispute Mistakes

Mistakes do happen. It’s possible that your credit report has errors. Once you’ve studied your report, you should be able to find any errors present. If you do find errors, you can dispute them through the reporting agencies.

Experian has a great guide on disputing your credit report, check it out.

Now that you’ve checked your report and disputed any mistakes on your account, it’s time to begin the repairing process.

3. Reduce Debt

One of the first things you should do to repair your score (and before considering buying more debt) is reduce any existing debt. Make a list of all of the accounts you owe money on, and then devise a payment plan. Paying all of your debt off immediately may not be feasible, so make a payment schedule and stick to it.

4. Pay Your Bills

It’s amazing how much a late or missed payment can affect your rating. If you have a long history of late payments, the best thing you can do is begin paying your bills on time, and continue doing so.

5. Manage Your Spending

If you have a credit card, you should be aware of the way your spending habits impact your credit rating. Do you have a maximum amount of credit per month? You shouldn’t be spending anything close to that amount on your cards. If you need to, do so, but don’t use your credit card for every purchase just to get “points” or accrue rewards.

If your number is low because you have no history, then you may want to consider getting a small loan to build your payment history. If you’re considering buying a car, then you could get a lower priced vehicle, put down a large down payment, and make monthly payments on your loan. Don’t buy an expensive car if you have a low credit score. 10% interest on $20,000 is A LOT more than $10 interest on $5,000. It’s advisable to take out a small loan until you have a higher credit score, and then take out a larger loan.

If you’re wondering what financial number you need to buy a car, you now know that there’s no minimum number needed, but you need to have a good credit score to receive good loan terms.

Taking out a loan is a huge commitment, so you should never rush into it. Make sure you carefully consider your financial situation and the impact that the loan will have on your lifestyle. Better safe than sorry ;).