For first-time buyers, the process of buying a car holds a lot of unknowns. If you’re planning to finance your first car, however, you need to understand credit basics.
Key Takeaways
- Your credit score tells lenders how creditworthy you are. The higher the score, the more likely you are to nab a great interest rate on your auto loan.
- A credit score is considered “Good” when it’s at least 670.
- There are a number of things you can do to improve your credit rating, such as make timely payments, keep credit card utilization low, and open different types of credit accounts.
- Whatever your credit score, you can obtain an auto loan. But a higher credit score means that you’ll spend less money on interest!
What is credit and why do I need it?
Your credit score tells lenders how likely you’ll be to repay your loan. The score itself is created by the analytics company FICO, which considers different aspects of your payment history to assign you a score between 300 and 850.
You want your credit score to be as high as possible, because it will show lenders that you’re worthy of a low interest rate. When your interest rate is low, you’ll save money as you pay back your loan.
What’s a good credit score?
Your credit score (a number between 300 and 850) is rated as “Good” when it’s at least 670. This score tells lenders you’re unlikely to become delinquent. If you can score a rating of “Very Good” or “Exceptional,” you can land the best interest rates from lenders.
Here’s a look at credit ratings according to score:
- Very Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Exceptional: 800-850
How can I improve my credit score?
There are several things you can do to improve your credit score. Because your overall score is weighed differently by various aspects of your finances, some actions will affect your score more than others.
There are five main aspects that contribute to your credit score, each of which is weighted differently:
- Payment History 35%
- Credit Utilization 30%
- Length of Credit History 15%
- Mix of Credit 10%
- New Credit 10%
Because your payment history is weighed so heavily, you’re going to want to make all of your payments on time. Payments that are 30 days late can negatively affect your score.
You can also begin to pay off those credit cards! To improve your credit score, you want to keep your credit utilization at or below 30% of each card’s limit.
If you pay off a credit card, don’t close the account. Having a debt-free card will improve your credit utilization ratio, and it will also help contribute to the part of your score that considers the length of your credit history.
Since having a mix of different types of accounts can boost your score, you’ll want to open more than just a credit card account. There are three kinds of credit: revolving credit (such as credit cards and personal lines of credit), open credit (auto loans, student loans, mortgages), and installment credit (utility bills, charge cards).
Finally, you’ll want to keep an eye on your credit. You can use free apps, like Credit Karma, to review your credit score at any time. And everyone is entitled to a free annual copy of their credit report from one of the big credit bureaus (Equifax, Experian, or Transunion). If you find any discrepancies on the report, contact the credit bureau to have it removed! By doing so, you can help your credit score.
Can I get an auto loan with no credit or bad credit?
Definitely! In fact, there are specific loans available for anyone who wants to buy a car with little to no credit. However, these loan packages often come with a higher interest rate, which means you’ll end up spending more as you repay your loan. If you can, it’s a good idea to repair your credit and aim to obtain a loan with a lower APR.
You can also ask a trusted family member if they’ll cosign with you on a loan. A cosigner with great credit may help you score a lower interest rate. But keep in mind that your cosigner will also be responsible for the loan if you fail to make payments.