What Credit Score Is Needed to Buy a Car?

A 2021 study showed that the average cost of a new car in the U.S. was $45,031, as of Fall 2021. If you’re looking to invest in a cool new ride, it might be time to start thinking about credit scores.

Whenever you apply for a loan or new credit, the lender will run a hard inquiry on your credit history, and the higher your credit score is, the lower your interest rate.

Your credit score reflects your creditworthiness and how risky it is to lend you money. Someone with a high credit score would easily be granted a loan, whereas the process might be difficult for someone with a lower score.

But what minimum credit score would you need to be approved for a car loan? What should you do if your credit score is lower than the required threshold?

Credit scoring models used by auto lenders

Lenders use the major credit score models such as FICO or VantageScore to check your credit score. In 2021, 90% of the lenders used the FICO scoring model to review loan applications.

However, ask your lender which scoring model they use before they run a hard inquiry on your credit history. Lenders may use your general FICO credit score or your industry-specific score.

General FICO scores range from 300 to 850. However, the FICO auto industry scores range from 250 to 900. Both general and industry-specific scores indicate to the lender how risky it is to lend you money based on your past financial transactions.

Whether it’s general or industry-specific, a higher score indicates a lower risk for the lender if they grant your loan and allows them to charge a lower interest rate on the credit they give you.

You can check your general FICO scores on websites such as AnnualCreditReport.com. Most card companies allow you to view your credit score for free as well. However, to view your industry-specific score, you must pay a monthly fee between $19.95 and $39.95 for a subscription to myFICO.

What is the minimum credit score needed to buy a car?

There’s no magic credit score that automatically qualifies you for a car loan because each lender has its own criteria.

When lenders review your application for a car loan, they primarily look at your income and credit score. They look at your score to estimate whether you make enough money to pay back the loan with interest.

The lender will judge your credit score to determine whether you are responsible and trustworthy. Lenders divide customers into five categories based on their credit scores:

Super Prime Customers have a score between 781 and 850.
Prime Customers have a score between 661 and 780
Non-Prime Customers have a score between 601 and 660
Sub-Prime Customers have a score between 501 and 600
Deep Sub-Prime Customers have a score between 300 and 500

Typically, if your score is higher than 661, you may qualify for most conventional car loans. Before you apply for a car loan, it’s a good idea to check your score and see where it currently stands.

Can you buy a car with a low credit score?

If your credit score is below the prime level (below 661), it doesn’t mean that you can’t buy a car. You will find lenders willing to lend you money for your new car even with a low credit score.

However, you are likely to be charged a higher interest rate on this loan. Here are some things you can do if you want to buy a car, but your credit score is poor:

Agree to pay a higher interest rate.
You can look for a car that costs a little less or comes with a more manageable monthly payment. Exploring your car options based on your income and credit score is wise, and the loan process is smoother.
In addition, finding a more budget-friendly car prevents you from biting more than you can chew. More manageable monthly payments mean you can manage to pay off your existing debts comfortably, increase your credit score in the process, and reduce your stress.
Take credit from a company specializing in financing those with a poor credit score. However, there will still be a relatively higher interest rate on your loan.
Get a co-signer for the loan. Use a co-signer as a last resort because most people find it difficult to get someone to cosign for a loan. When someone cosigns your loan, it means that they’re assuring the lender that they take the responsibility to pay back the loan in case you are unable to.
If you have enough money, consider making a downpayment while buying the car. A downpayment reduces the amount of credit you need and reduces the burden of monthly payments. A down payment also means you pay a smaller amount in interest.

Buying a car is possible even with a low credit score. However, if you are willing to wait a few months to buy your car, you can take some measures to improve your credit score to get a better loan offer.

How to improve your credit scores before buying a car

If you are looking to buy a car soon, you should start building your credit score now. Taking a few months to work on your credit score before applying for the car loan can save you money on interest. It also makes the whole process much more seamless.

Here are a few ways to improve your credit score:

Pay off pending debts: You should try to pay off any pending debt before the due date. You don’t need to wait for the statement balance to start repaying the borrowed credit, but instead, you can keep paying it off through the month. Ideally, try not to overspend on credit and spend less than your disposable income.
Check your credit report: You should check your credit report every few months for errors. Credit bureaus often make errors on the credit report that go unnoticed, but you can contact them and have mistakes corrected.
Reduce your revolving debt: If you have multiple credit accounts, shift around money to make sure that you are not utilizing more than 30% of the credit available to you in any account.
Reduce loan applications: When you apply for new credit, the hard inquiry on your credit history affects your score for one year and shows on your credit report for two years. So unless it’s essential, avoid applying for loans before you purchase your new car.
Don’t cancel your cards: If a credit card doesn’t come with an annual fee, don’t cancel the card, even if you barely use it. Having a credit card for a long period improves your credit score.
Extend your credit limit: Request companies to extend your credit limit on your cards, but don’t use that extra credit. This gives you a better credit utilization ratio and improves your score.

Here’s an example: If you had a credit limit of $100 and used $50 of it, your credit utilization ratio is 50%. However, if you ask your card company to extend your credit limit to $200 but still only use $50, your new credit utilization ratio is 25%.

Your credit utilization accounts for 30% of your score, so it’s important to maintain a low ratio.

Ready to improve your credit score?

When you apply for a car loan, lenders will look at several aspects of your finances, like your income, credit score, previous debts, etc. This is all done to estimate whether you are someone who will repay your loan. While a low credit score does make it challenging to get a car loan, it’s still possible to get one.

Different lenders will look at other criteria before granting a loan, and there’s no fixed credit score threshold below which you will not get a car loan. However, there are several ways to improve your credit score before applying for a loan.

One of those ways to improve your credit score is by signing up for early access to Vital Card. Vital is a credit card company that encourages its customers to spend responsibly and build their credit scores. It is the credit card that pays you to share and spend responsibly.

Sources

“The Average New Card Costs…,” CNET

“FICO vs. Vantage Scores...,”Forbes

Annual Credit Report.com