Car Financing and Your Credit Score

In recent years there has been a lot of attention given the importance of a good credit score. I am sure you have seen the commercials and advertisements that talk about how your credit score can greatly impact you car financing auto loan and any purchase that you may finance.

It wasn’t too many years ago when you applied for an auto loan you were either approved or turned down. Your credit score determined a pass or fail with no in between. If you were approved you got the current interest rate for your auto loan whether you had great credit or good credit. Today things have changed quite a bit when it comes to applying for and getting approved for an auto loan.

Credit Score Basics

To bring you up to speed on the basics of credit score or credit rating the first thing to understand is that anyone that has financed something has a credit score also know as a FICO score. Financial institutions that lend money to consumers report to one or all of the three major credit bureaus on the monthly status of your open loans along with past loans, late payments, defaults and any credit collections, bankruptcy filings or liens. These credit bureaus using a numerical rating system that ranges from 300 for lowest credit rating and 850 for the highest. Your credit activity gets numbers assigned to all the different transactions which are compiled to make up your credit score or rating. If you never had any credit experience you will not have a credit score. In the car financing business you are known as a ghost. If this is the case you may need a co-singer or perhaps you can qualify for one the auto makers first time buyer programs.

Auto Financing and the Impact of Credit Score

Most new and used cars that are sold today are financed by auto loans. Most of these auto loans are provided by banks, credit unions and automobile manufacturers. These sources for auto financing normally require a credit score above 700 for the best interest rates and terms. Having a credit score below 700 will not keep you from being approved for car financing, but it will have an impact on your interest rate and repayment term.

The financial institutions that make auto loans use a tier system to determine your eligibility and interest rate for auto financing. For example; I mentioned earlier that a credit score of 700 will give you the best interest rate. If your credit score was a 675 you may have to pay a higher interest rate on your car loan that may be a couple of points higher than the car buyer with a 700 FICO score. Then a FICO score of 650 may be a few more points high and so on. I have seen car buyers pay interest rates as high as 24.9% on their car loan because they had a low credit score. This use of credit tiers by auto manufacturers lending divisions has often been abused by car dealership financing scams.

The difference between a lower credit score and the highest credit score could be as much as a couple hundred dollars a month in your car payment. Your FICO score can also dictate the amount of down payment you will be required to have on your car purchase. The tiers that determine your interest rate will also determine your down payment. The car buyer that has a 700 FICO score or higher may not need any down payment and the person with a very low score may be required to put down as much as half of the car financed. So you can see how important it is to have a high credit score when you are financing a car.

To avoid car dealership financing scams it is important for you to know your credit score. I personally use credit score monitoring service that is very inexpensive that notifies me whenever my credit is ran along with any changes that will affect my credit score. I was actually able to stop my identity from being stolen when I was notified that my credit was run by a cellular phone company. I was notified and was able to freeze my credit so the identity thief was unable to open any more accounts. I filed a police report and one piece of paper and the crisis was averted. Check Them Out Now! I wouldn’t be without the service. I can check my credit at any time and keep track if I am trying to improve my credit score.

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