If you are trying to get an auto loan, you may be worried about your credit score. Is it high enough to get you favorable terms? What is the highest credit score possible? These questions are going to be answered here so that you can be prepared and ready to get a car loan.
Lenders often choose the credit score they want to use when they evaluate your application for an auto loan. Some lenders are going to use different scores or might even test multiple credit scores. Therefore, you aren’t going to know which one they see when applying for a loan.
What Are the Differences in Credit Scores?
The fundamentals behind credit scoring models are quite similar, but each one uses particular criteria to analyze your report and generate your credit score.
Sometimes, there can be small but important differences. For example, one scoring model might consider anything that went to collections as a negative thing, even if you paid it off, while another might completely ignore collections accounts.
VantageScore and FICO are the two top leaders for credit scoring, and they both share similarities. Both models look at the information from one of the credit reports, using Equifax, TransUnion, or Experian to help determine your score. Higher scores are always better because they can indicate that you aren’t as likely to miss your loan payment each month.
Generally, the base models have a similar scoring range from 300 to 850. FICO, though, has scores specific to particular industries. Auto lender scores can range from 250 up to 900.
What Credit Score Does a Car Lender Use?
You may not know which credit score your auto lender is going to use, but these are some of the most popular options:
- FICO Auto Scores: You can find many versions of the Auto Score from FICO, which was created specifically for lenders catering to auto loans. These scores are still based on the general FICO Score, but then it is altered to help predict the likelihood of a person repaying their auto loan on time. If you already have a history with auto loans (and paid them back in full and on time), this could be a deciding factor for your current FICO Auto Score.
- FICO Score 8 or 9: The eighth and ninth versions of the FICO scoring models are the latest on the market. While FICO did not create them for auto lenders specifically, they’re used widely for a variety of credit purposes. Therefore, auto lenders might use this base FICO score when they review your loan application for an automobile.
- VantageScore 3.0 or 4.0: VantageScore is a credit scoring agency that was founded by the major credit bureaus (Equifax, TransUnion, and Experian.) The 3.0 and 4.0 are the latest versions of its scoring model. Between 2016 and 2017, about 70% of auto lease and loan decisions made by auto lenders used the VantageScore model.
You should be aware of many small differences between VantageScore and FICO and how they use the information provided in your credit report. There are also different scoring models within the same company. Regardless of the one the lender chooses, all the scores rely on an analysis of one of the credit reports. Therefore, some actions can help one score, such as making payments on time, and it can also improve all scores at the same time.
How Do You Check Your Auto Score?
Most people believe that they can only check their FICO Auto Score by buying their credit reports and enrolling in a credit monitoring service. While you can do that, and it offers many benefits, you can get your credit score for free as well.
Each score that you get is going to depend on the underlying credit report and scoring model. Still, knowing all of your scores can give you a better idea of where you stand before applying for your auto loan.
Consider these places to get your free score:
- Credit unions and banks
- Private student loan lenders
- Credit card issuers
- Financial and credit counseling organizations
- Online comparison sites for financial products
- Annualcreditreport.com (you get one free report each year from all three credit bureaus)
- Experian (you can gain access to the FICO Score 8 from your Experian credit report)
What Is the Highest Credit Score?
Even though auto loans might be a little different, you should be aware of the highest credit score you can get on average. With the FICO model, 850 is the highest credit score you can achieve, but this is under perfect circumstances. While there are a few people with such a high score, it is seen as redundant by most lending institutions.
Generally, if your score is over 740, you have a great score, and it can put you in the market for better interest rates on a variety of loan needs.
Do you need a perfect score to get an auto loan? No, you do not. If you’re already near that 740 mark, you don’t have to work toward improving your score before buying a car. To do that is just going to waste time and probably frustrate you immensely. Instead, apply for a loan with a few reputable lending institutions. Make sure to check interest rates and terms so that you know what options are out there and can get the best deal.
What If You Don’t Have a Perfect Score?
Again, the highest credit score should not be your goal here. As long as you have a score of about 740, you are sure to get favorable terms. Still, most people don’t have a credit score that high. If you have a score of less than 600, it’s a good idea to start improving it before you get an auto loan.
Some lenders are still going to offer you a loan, even if you have a low score. It does depend on a few things, but the issue here is that you are going to pay exorbitant interest rates because you’re considered a high-risk borrower. Therefore, if you have a lower-than-average score, it might be better to raise it before requesting the loan.
The question is, how do you do that? There are a variety of ways to improve your credit score, but they take time and diligence.
Pay Down Your Credit Card Balances
Have you heard of the credit utilization rate? It’s the percentage of your credit card limits that you’re using right now, and it is one of the most important factors for credit scoring. You can easily figure out how much of your credit you are using. To do this, find out what your credit limits are on all of your credit cards. Then, get the current balance on all of those cards, ignoring the last payment you made, as it might not have had time to reflect on your credit score.
Once you know these numbers, divide the total balance by the overall limit. Let’s say you have a total credit limit of $50,000, and your balances on all of your cards equal $25,000. When you divide the balance by the limit, you get 0.5, which means your utilization rate is half of the total credit limit.
The goal is to shoot for a utilization rate of under 30%. It is better to have as low a utilization rate as possible. Therefore, if yours are higher, you should work on paying down those balances, which can quickly boost your credit score.
Consolidate Your Credit Card Debt
Many people cannot afford to pay more than the minimum balance on their credit cards. Some can’t even pay the minimum amounts and get behind on payments. If that is the case, you may want to consider applying for a loan to help consolidate your debts. Use that money to pay off all of your credit cards. That way, you have one low payment to make each month. Plus, a personal (installment) loan like this isn’t going to impact utilization ratings. Therefore, you can transfer your debt to a personal loan from the credit cards, improving your scores. Just make sure that you don’t add more charges to the cards, racking up the bills again.
Keep Your Credit Card Accounts Open
Though it may seem like a good idea to pay off a credit card and close it so that you aren’t tempted to use it again, this is likely to backfire. If you close a credit card account, even one you don’t use, it is going to lower the amount of credit you have available, which increases the utilization rate.
Of course, there are exceptions to this rule. For example, if the credit card in question has annual or monthly fees, it might be a good idea to close that account. Also, you may want to close your credit accounts if you know that you are going to have problems with overspending.
Continue Making Payments on Time
Even a single late payment could damage your credit score more. You need to ensure that your most recent credit history is clean before you apply for an auto loan.
Don’t Fill out Other Loan Applications
If you apply for an auto loan and another type of loan at the same time, you are taking on extra debt, which could damage your credit score. Unless there is a pressing need, such as the act of consolidating your debt, it might be wise to put off a new loan and credit card applications until you have bought the car.
Review Your Report and Look for Errors
Make sure you request your credit report from each of the three bureaus. Check each one thoroughly for errors and file disputes where necessary. The credit bureau has to investigate the claim and validate, delete, or update the information.