When you’re planning to buy a new vehicle, it’s important to prepare for the purchase long before you step into the dealership.
For starters, you want to make a budget. It doesn’t hurt to know the type of vehicle you’d like to buy, too, and the average cost of insurance that goes along with it.
But most of all, it’s important to review your credit before you apply for an auto loan.
Your credit score has a big impact on whether you can qualify for auto financing. Your credit score also affects how much you’ll pay for your loan if a lender approves your application.
Yet before you set off to check your credit reports and scores, there’s something you should know. The credit scores you find online probably won’t match the score an auto lender uses to evaluate your car loan application.
In fact, when you finance a vehicle the lender may use a credit score that’s completely different from anything you’ve seen before.
Which credit score do car dealerships use? It’s a simple question with a complex answer.
In the world of credit, you (as a consumer) aren’t the primary customer that credit bureaus and credit score creators are trying to win over. Rather it’s the lenders, credit card issuers, and other companies who are the industry’s target market. Each lender decides which credit products it will purchase and use to evaluate new loan applications.
Lenders can choose between many different credit scores. In fact, the sheer number of credit report and score combinations (see below) makes it impossible to predict which credit score a lender will check when you apply for an auto loan.
Despite the many possibilities, when you apply for an auto loan, a lender is likely to use one version of the following: FICO Auto Scores, FICO Scores, or VantageScore credit scores.
In many ways, FICO Auto Scores predict risk like traditional FICO scoring models. But these industry-specific scores focus more on how likely you are to repay an auto loan late.
For example, late payments (or other negative information) on past auto loans could damage your FICO auto score more than other derogatory items.
Instead of the traditional 300-850 credit score range, FICO Auto Scores feature a scale of 250-900.
A higher FICO Auto Score still indicates less credit risk — just like a higher score means less risk under other credit scoring models. With a higher score, you’re more likely to qualify for car financing and get a better interest rate.
Lenders use multiple versions of the FICO Auto Score. (Think about the many versions of smartphone software, and how some users will update their operating systems while others continue to use older options.)
The newest version (as of this writing) is FICO® Auto Score 10, introduced in 2020. However, many auto lenders still use FICO® Auto Score 2, FICO® Auto Score 4, FICO® Auto Score 5, and FICO® Auto Score 8.
Many auto lenders use base FICO Scores to make credit-granting decisions. Base FICO scores predict the likelihood that you’ll make a late payment on any credit obligation within the upcoming 24 months. They also feature the traditional score range of 300-850.
Lenders use numerous versions of base FICO Scores. FICO Score 10 is the most recent (as of this writing). Yet FICO Score 8, introduced in 2009, remains the most widely used version.
Lenders have been using FICO Scores to guide credit decisions for more than 30 years. But in 2006, a new credit scoring option became available —VantageScore. The VantageScore credit score was born out of a collaboration among the three major credit bureaus.
The two most recent versions of the VantageScore credit score (3.0 and 4.0) feature the industry-standard credit score range of 300-850. Older VantageScore models had a scale of 501-990.
VantageScore credit scores are becoming increasingly popular among auto lenders. The 2019 VantageScore Market Study Report revealed that auto lenders used close to 131 million VantageScore credit scores between July 1, 2018 and June 30, 2019.
Your credit score influences your loan's interest rate as a potential car buyer. In general, higher credit scores lead to lower interest rates.
The fact that there are so many credit score options makes it difficult to pinpoint exactly what is a good credit score to buy a car.
Experian provides some helpful details that show what type of loan you might qualify for based on your credit score range.
__How Your Credit Score Affects Your Auto Loan Interest Rate __
|Credit Score Range||Credit Score Category||Avg. Interest Rate (New Auto Loan, Q1 2020)||Avg. Interest Rate (Used Auto Loan, Q1 2020)|
|579 or Lower||Deep Subprime||14.39%||20.45%|
Based on the details above, you should aim for a credit score of 720 or higher if you want a shot at qualifying for the lowest auto loan interest rates available.
Keep in mind that an auto lender will consider other factors when pricing your loan as well, such as the length of your financing term, your income, and your employment status.
According to FICO, most auto lenders use FICO Auto Scores for lending decisions. But even if a lender uses this industry-specific scoring model, there’s no universal cutoff point between a good credit score and a bad one.
Lenders can use different standards when assessing your credit scores — whether those scores are FICO Auto Scores or otherwise.
Nonetheless, lenders do tier loan pricing based on your credit risk (and they assess that risk in part by looking at your credit score).
Translation: A bad credit car loan costs more than a good credit car loan. It’s possible to learn how to get a car loan with bad credit, however, you will want to assess the quality of the car loan offer and whether it will benefit your financial standing in the long term.
Let’s say you want to finance a new vehicle that costs $20,000. Because your goal is to pay off the debt faster (and pay less interest), you opt for a 48-month loan term. Here’s a look at how your FICO Auto Score could impact the price of your auto financing from your APR, to your monthly payment, to the amount of interest you pay overall.
|FICO Score||APR||Monthly Payment||Total Interest|
*The example above is hypothetical, based on the myFICO Loan Savings Calculator.
With any type of car financing, better credit scores make the process easier and more affordable.
According to FICO, a credit score of 600 ranks as “fair.” VantageScore classifies a 600 credit score as “poor” (though at 601 you move into the fair range). So a 600 credit score typically falls somewhere in between bad credit and good credit.
You can most likely qualify for a car loan with a credit score of 600 (assuming there aren’t other non-credit-related factors working against you).
But you should expect to get higher interest rates. With a credit score of 600, most lenders will consider you to be a subprime borrower and will price your loan accordingly.
Maybe you are wondering what happens in the case of refinancing your vehicle after you are approved for a car loan. In this case, does refinancing a car hurt your credit score or affect your interest rate? And is there a way to best prepare your credit score before applying for an auto loan or refinancing your current vehicle?
Let’s take a look.
You can’t control which credit report or credit score a lender will use when you apply for a new auto loan. But you can work to get your credit rating in the best shape possible.
A healthy credit report will help you regardless of the scoring model a lender uses to calculate your credit score.
Before you apply for an auto loan, you should review all three of your credit reports. The Fair Credit Reporting Act grants you free access to your three reports once every 12 months. AnnualCreditReport.com is the website you’ll want to visit to claim your credit report freebies.
Next, consider checking your credit scores. You may be able to access a free FICO Score through your credit card issuer or online. Self customers can monitor their VantageScore 3.0 credit score (based on Experian data).
Want to see your FICO Auto Score specifically? You’ll need to pay for a credit monitoring option through either myFICO or Experian.
Regardless of which credit score brand and version you choose, all FICO and VantageScore credit scores are directionally similar. In other words, if your base score is trending upward, then your FICO Auto Score and VantageScore credit scores are likely moving in the same direction.
So monitoring any type of credit score may help you, even if it doesn’t match the exact score a lender uses.
Finally, do what you can to improve your credit before you start car shopping at the dealership. That way you don’t have to dwell over the question of “how fast will a car loan raise my credit score?” if it’s lower than desired.
If you keep your payments on time, pay down your credit card balances, and avoid applying for too much new credit at once, you should be off to a great start.
Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication. See her on Linkedin and Twitter.