Very simply, your credit score represents how trustworthy you are to money lenders. There are a few different kinds of credit score, but the most common is called your FICO score. The higher the score, the more likely banks and other institutions are to lend you money because they can assume that you’re less risky.
That number is usually between 300 and 850. It’s affected by things such as:
Basically, the longer you’ve been making on-time payments for loans you’ve received, the better your credit score may be. If you miss credit card payments or constantly take out loans you can’t really afford, your credit score will be bad.
Usually, your credit score just sits there in the background minding its own business. It’s not something you really need to worry about most of the time.
When you go to do something like, say, buy a car, suddenly it’s the most important number in your life. That’s why you should have a good idea about what your score is, even if you’ve never needed it before.
You can check your score for free once a year. Experian has a lot more information on that, as well as the tools to do so, right here.
There are different ways of quantifying a good credit score, and different agencies may have different cutoffs. For instance, the categories super prime (which is excellent), prime, nonprime, subprime and deep subprime (which is very poor) are common in the auto-lending market.
In general, though, there are three broad categories. You can have a good score, a bad score or be in between the two with a fair score.
A good score starts at 690. A good credit score will make you eligible for most loans at decent interest rates. Excellent credit scores start at 720, and as you get above 750, there will be very few barriers to obtaining a loan.
On the other side, anything less than 630 is considered poor. If you have poor credit, you can still get a loan, but you will probably have to pay a higher down payment. The loan often comes with higher interest rates, and the maximum amount that a lender is willing to loan you will be lower than if you had a higher score.
When you get below 500, your credit score is considered very poor, and you may have difficulty getting any lines of credit. It is still possible to finance a car, but you will be offsetting the low credit score in another way.
Speaking of buying a car, many are concerned about the process itself. The credit score is complicated enough on its own; can buying a car make it worse?
It’s difficult to answer the question in a straightforward way because it depends on a handful of factors.
However, there are two major stages of buying a car, and they can affect your score differently. The good news is that you can use both to your advantage.
Whenever you apply for a loan or credit card, it can hurt your credit score — though unless you are frequently applying for credit lines, it really isn’t something to worry about. We’ll go through it quickly in this article, but you can find a lot more information from Experian here.
First, there are two different kinds of credit checks.
A soft check, or soft inquiry, is usually done when you prequalify for a loan or someone does a background check on you. If you have ever leased an apartment, bought a cellphone plan, filled out a quick online loan prequalification form or checked your own score, your credit score has been checked via soft check.
The good news is that a soft check doesn’t affect your score. Sometimes they are not even recorded.
A hard inquiry, however, is recorded and may affect your score.
Simply put, if you apply for a credit card or a loan, that agency will likely do a hard credit check. They want to make sure you are trustworthy.
A hard check may lower your score. It won’t lower it much, but if you have a habit of applying for loans, you may notice a decrease. You can find more about that here.
One way to tell the difference between a hard check and a soft check before they are done is simple: A lender must specifically ask for your permission before doing a hard check. They don’t have to ask to do a soft check. If you are filling out an application for credit, not a prequalification, they will ask and there will be a hard check.
Your credit score will be much more affected by the actions you take after you buy the car. Once you are making payments on a loan, you are directly affecting your trustworthiness.
If you pay everything on time and keep your finances under control, your credit score may improve. You’ll be building great history and proving that you can be responsible.
If you miss payments or begin to increase your credit card balance because you have to compensate for a high auto loan payment, your credit score will suffer.
So you know what a credit score is now, and you know how it can be affected by purchasing a car. That’s great! There’s still one big piece of the puzzle, though.
What can you expect when you actually go in to sign the papers?
Well, like we said before, there are basically three big categories of credit score. Depending on what category you fall into, you will have a different experience.
When you have good credit, it’s easier to get a loan. With good credit, you qualify for loans that don’t need a down payment, you usually qualify for any promotional offer that a car dealership might be presenting, and your interest rates will be lower.
The loan amount you qualify for is also higher. It’s much easier to qualify for a $40,000 loan if you have a score above 780 than it otherwise would be.
There are, of course, a lot of other factors, especially your income and your current debt-to-income ratio, so it’s not a guarantee. However, a good credit score will ensure the best chances.
One of the biggest things to understand is that because of the lower interest rates and a greater number of competitive lender options, a bigger loan with a good credit score may have lower monthly payments than a loan for a lower amount with a worse credit score.
If your credit is between prime and nonprime (620-799), you have OK credit. You will qualify for most promotional offers, your interest rates will probably be in the single digits, and you should qualify for enough money to afford most new cars.
You probably won’t qualify for a zero-down loan, but it does mean you have the perfect opportunity to finance a car, prove you can be responsible with the money and quickly make your score better.
We’ll go into buying a car with bad credit in more detail shortly, but suffice to say it’s a bit more difficult. It is still entirely possible, but you will need to offset your bad score by doing something else that proves you can handle the responsibility.
The one thing you must be weary of is that there are a lot of companies that prey on people with a low credit score. They will make you promises like, “We finance you no matter what,” and they are more than happy to allow you to take out a loan you can not afford. They will be making a lot of profit from the interest, and they have no sympathy for you if you miss a payment and they repo your car.
Make sure to do your research and stick with trustworthy places. It goes both ways: You need a trustworthy lender just as much as lenders need you to be trustworthy.
Instead, follow these quick tips and you’ll have an easier time buying a car with bad credit.
One of the best things to do is to buy well within your means, and use a small loan to improve your credit in order to buy a more expensive vehicle later on with a bigger loan.
However, there are tricks to secure the perfect loan for your dream ride. Experian has an excellent article about the process here, but we will go through it quickly. There are three main things you can do.
The best way to offset bad credit is to apply for a smaller loan. That means you will pay less in interest and companies are more likely to trust you because it’s easier to repay a lower amount.
The best way to lower a loan amount while still getting the vehicle you need is to increase the down payment. If you want a $30,000 vehicle, conventional wisdom will tell you to put down 10%, or $3,000, and get a loan for the remaining $27,000.
If you can instead pay 20%, you’ll be lowering the loan amount to below $25,000, and that can save you from paying nearly $3,000 extra in interest. That means you pay more on the down payment, and you’ll pay a lot less in the wrong run.
The other thing you can do is to get a co-signer.
Simply put, a co-signer is someone that is willing to vouch for you. Usually it’s your parents or a friend that is in a good financial position, and by co-signing, they are sharing the responsibility of the loan.
If you have very little credit history, it can be a great way to build history. However, you will not have control over how your co-applicant manages the account. Therefore, the co-signer route also requires a good amount of trust with your co-signer, so it’s not something to go into lightly.
Credit is a complicated subject that can seem unapproachable. We hope this quick guide has helped you on your journey. If you still have questions, be sure to head to Experian.com to check your score, find even more information and turn an otherwise stressful situation into an exciting one.
