Buying a car is one of the biggest purchases a person makes in his lifetime. Instead of focusing on trivial things like deciding what color or model to buy, you should pay more attention to your budget and—most importantly—your credit score. Depending on these two factors, you may or may not be eligible for a car loan.
While financing for cars with bad credit is more common nowadays, these deals typically come with conditions that may not be beneficial for the customer. The ideal conditions wherein a person should buy a car is when they have enough money and good credit.
Keep scrolling to learn more about why you should never buy a car without first knowing your credit score.
What Is a Credit Score?
A credit score is a scoring system created by Fair Isaac Corporation (FICO) and used by most financial institutions of this day. This score identifies a person’s creditworthiness or their ability to pay a lender back for the money they’re owed. Your credit score is based largely on your credit history, which is made up of the following factors: your debt, number of open accounts, and repayment history. Depending on the company, other factors may also affect your credit score.
Why Is Credit Score Important When Buying a Car?
Most people don’t know this, but maintaining good credit is one of the best money-saving tips out there. Lenders will base your eligibility for a loan on your credit score.
A healthy credit score means you’re capable of paying your dues on time. This influences lenders to feel more inclined to give you a loan. You may also qualify for better rates when you have a good credit score, so you end up paying less in interest.
On the other hand, a bad credit score means you’re less capable of paying your bills on time—if at all. Thus, lenders are less likely to approve your loan requests or give you competitive rates. Buying a car with bad credit can often cost you more money down the road.
What Is the Minimum Credit Score to Buy a Car?
Experts recommend having at least a credit score of 661 or above when getting a car loan. This qualifies you for lower interest rates of around 3.56% for a new car loan or 5.58% for a used car loan. Buyers with a credit score of 500 or less can expect to receive more expensive rates, some going as high as 17% or more.
Factors That Can Affect Your Credit Score
If you meet the recommended credit score of 661 or above, you shouldn’t be concerned about whether you’ll get approved or not. But if you want to strengthen your odds, try to apply the following tips to your loan application:
Offer a Larger Down Payment
Making a large down payment can significantly lower your overall costs. It may even win you a lower interest rate, depending on the company you work with. A huge down payment can indicate that you’re more than capable of making your monthly dues. Lenders will see you as less of a risk to their business and may offer to work with you despite your credit score.
Display Financial Stability
If you think you’re financially secure in other areas of your life, it’s a great idea to show this off to your lenders. Despite your credit score, they might be swayed to give you the loan you need if they see that you’re capable of managing your finances well. Present documentation that indicates your financial status, such as your pay slips or proof of address.
How to Build Your Credit Score Before Buying a Car
Luckily, it’s not too late for you to fix your credit score before you make your first visit to the dealership. A healthier credit score will ensure you get the loan you need and the rates that you prefer. The following tips can help you achieve a better credit score:
Only Use Your Credit Car on Purchases You Can Afford
Going on a spending spree because you finally have a credit card is not the way to go when you’re trying to build good credit. This will only get you into debt and bring your credit score even lower than it is. One of the best ways to improve your credit score and avoid financial ruin is to only use your credit card on things you can afford. That way, you won’t have trouble paying back your loans, which—in turn—can make creditors feel like you’re a responsible borrower.
Always Pay Your Bills on Time
The longer you wait to settle your credit card debt, the more it may devastate your credit score. As much as possible, don’t let your credit card bills extend past their due date. Pay on time or earlier so you can avoid penalties and late charges. This will only bring your costs higher, making it more difficult for you to pay off your loans.
One Is Enough
For first-time credit card holders, one card is enough for now. Your primary focus should be on developing a healthy relationship with your credit card to avoid overusing it down the line. The more active cards you have, the more likely you are to use them and—in turn—the harder it will be for you to catch up with payments. Try to build discipline first before anything else.
The Bottom Line
Not everyone has the resources to buy a car with cash. If you’re in the market for a new or used car, making sure your credit scores are in good condition is the first step to becoming a car owner. This increases your likelihood of getting approved for a loan and getting the car of your dreams. If your credit score is not where you want it to be just yet, the tips given above should help improve your odds. Give them a go and see if they work for you.