Credit Scores. To some people, they are sacred, and to others, they are a game of never-ending catchup. Either pride or infamy accompanies the thought of a personal credit score. However, regardless of how you feel about your credit score when it comes to obtaining a car loan, it is a vital tool to know and understand.
Fortunately, if you can get approved for a car loan and keep up with the payments, your investment will improve your credit score. Once you are financially ready, getting an auto loan is one of the best ways to help your credit.
So, how does that all work? Here is an explanation of how your credit score works when obtaining a car loan:
A credit score is a number between 300 and 850 that determines your creditworthiness. This score develops from various factors that help creditors decide whether you are a high or low lending risk.
Creditors use your history, your income, and the number of current credit lines to figure out your debt to income ratio.
Your credit score is the number that gives them a summary of this information so they can quickly decide whether they should grant you the loan for which you applied.
This credit score is often called a FICO Score. When it comes to auto loans, though, even though they are directly related to your credit score, they work a little differently than traditional credit inquiries.
(Spoiler alert: This difference can sometimes work in your favor when trying to obtain an auto loan.)
FICO stands for Fair Isaac Corporation. This abbreviation exists because this corporation was the first to extend credit using the numerical risk model that is now the standard for credit lenders.
Yet, what many people do not realize is that your true FICO Score is not precisely the score that is used when you try to obtain an auto loan. Instead, there is a secondary FICO Score, called an Auto FICO Score. This specific score only determines your eligibility for buying a vehicle.
Your Auto FICO Score differs from your generic FICO Score in that it is tailored towards your creditworthiness of purchasing an automobile. While your FICO Score ranges from 300 to 850, respectively, your Auto FICO Score ranges from 250 to 900.
Therefore, it is easy to see how with a fifty-point difference both at the bottom and at the top, auto lease brokers can be a little more forgiving than strict, generic FICO Scores.
Now, much like its universal credit counterpart, an Auto FICO Score continues to be a work in progress. Over the years, this score has undergone its fair share of variations, with the most recent finalization happening in June 2016.
This most recent update is called the FICO Auto Score 9 XT. This score utilizes data from TransUnion CreditVision Data to uncover 30 months (or 2.5 years) of credit history. This small window of data eliminates outdated information and helps offer you a clean slate sooner.
Here are the best ways to actively increase your FICO Auto Score 9 XT:
Pay your credit cards down consistently.
Pay off any debt that has gone to collections (if applicable).
Keep your credit utilization at or below 30% at all times.
When it comes to your credit score and your auto loan, it is a consistent flow of gives and takes. For instance, if your credit score is Deep Subprime and you get a loan, you will have a higher interest rate than a loan candidate with a non-prime, prime, or super-prime credit score.
However, suppose you continuously pay your bill on time and remain in good standing with your auto loan. In that case, it will play a more significant role in helping your credit score than if you were already an established prime or super-prime credit score holder.
Ironically, having a diverse portfolio of loans in good standing will help your credit much more than if you never took out a credit line. (This information is not to say that you should max yourself out on loans or credit lines of any kind. Yet, it is good news that even if you do not have a perfect credit score, the relationship between your credit score and your auto loan work together to help you overall.)
Whether your credit score is good or needs improvement, it pairs well with obtaining a car loan. Not only is a credit score necessary to get a car loan, but it also works in tandem with your car loan to help get your credit to an acceptable level.
Once you have achieved this level, and you use your auto loan to control your credit score, getting a car is only the first step into a world of possibilities.