When you set out to buy a car, one of the most important factors that car dealers take into consideration is your credit score. Before the dealer crunches the numbers, make sure you’re on the same page — or spreadsheet — as their finance manager. You can feel a little more confident when you understand the basics of a credit score, what constitutes a good credit score with which to buy a car, and what factors go into determining your credit score.
Credit Score Basics
A credit score is a number that represents a person’s ability to pay back a loan. That number will be somewhere between 300 and 850, with 850 being the highest credit score possible.
Many factors determine your credit score number. For instance, late payments and frequent use of credit will lower your credit score — as will the type of credit you use and the number of times someone pulls your credit report for review. These factors can make your credit go up or down depending on whether you have good financial habits or not.
Perfect credit scores are rare, with only 19.9% of people boasting a credit score between 800 and 850. Just 18.2% of people fall in the 740 and 799 range; 21.5% are somewhere between 670 and 739; 20.2% are between 580 and 669; and 17% are at the bottom, with a score of 579 or less.
While a credit score isn’t the only way to tell if you’re credit worthy, it is an important factor in determining your potential for qualifying for a loan.
What Is A Good Credit Score to Buy A Car
So, what is a good credit score to have if you want to buy a car? Like most financial questions, the answer isn’t so simple.
The truth is, dealers want to sell cars. And a dealer is much more likely to find a way to structure a car loan to accommodate a risky credit score than they are to deny a loan to someone. That may mean you can get a loan, but only with a higher interest rate. That interest rate will raise your monthly payment.
Don’t underestimate a car dealer’s willingness to work with you just because you have poor credit. You might have to pay a price for having less-than-good credit, but there is usually some sort of workaround to get you a car loan.
What Else Goes Into the Decision
Whether you have poor credit or even good credit, it doesn’t guarantee you’ll get either a good or bad deal on your next car loan. Most dealers take other factors into account when determining your ability to pay back a loan.
Here are some of those factors.
You can have a bad credit score for multiple reasons. Let’s say you just had to close down your business, but you have a long history of making payments on time. Closing your business can lower your credit score, even significantly. A car dealer should be able to differentiate between that one life event and your consistent history of paying off debt.
That’s not to say that a car dealer will make an exception every time you have a major blip in your credit history. But explaining that part of your history can only help your cause.
The more money you’ve set aside for a down payment, the less your credit score is going to matter. Short of paying for your next car in cash, your credit score will always matter somewhat, but paying 25% of the total cost as a down payment may help you get a better rate on a car, even with less-than-perfect credit. Sometimes the price of the car is negotiable beyond its MSRP.
Your employment history is another factor that will affect your credit decision. Long-term employment means stability and dependability to a lender. Job hunting, along with a poor credit score, means that you have an easy time starting things but a hard time finishing them. This is a bad sign to lenders.
If there’s a glaring problem with your credit, having a good explanation can sometimes help you get a better deal. That doesn’t mean you can explain away every credit issue. After all, dealers understand the difference between a good reason for imperfect credit and an excuse. But knowing what’s on your credit history and why can make a big difference. Simply knowing these other factors can help make your case too, even if your credit isn’t great.
Other Measures You Can Take
The last thing you should do is look at your credit three to six months before you formally apply for a loan. That gives you time to reconcile any mistakes that appear in your credit history. It’s possible that, with some extra work, you can improve your credit score before applying for a car loan.
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