New Car Interest Rates and Your Credit Score: How Does It Work?
Credit scores paint a financial picture of the kind of person asking for a car loan. It helps lenders to determine the likelihood that the loan will be re-paid.
Yet, most consumers don’t understand that their credit score is directly tied to new car interest rates. That is, it impacts the kind of rate you can get when purchasing a new vehicle.
As with any financial transaction, there is documentation that is required. However, it’s your credit report that’s at the center of everything.
What Determines Your Credit Score?
The biggest determination of a great credit score is paying your bills on time. Thirty-five percent of your total score is determined by prompt bill paying!
Secondly, maintain a high level of available credit, BUT, only use the smallest percentage of the credit line as possible. For example, using no more than 50%of your credit line will help your score.
What’s the Best Credit Range for New Car Interest Rates?
The breakdown for possible interest rates on car loans typically looks like this according to MSN Money:
• Excellent credit score 850 – 740: 3.2% interest rate (on average)
• Average credit score 739 – 680: 4.5% interest rate (on average)
• Sub-Prime credit score 680 and below: 6.5 – 12.9% interest rate (on average)
The sweet spot for the most optimal car loan interest rate is in the 740 range. If your credit score isn’t in this enviable range, a score in the high 600’s will work. However, you can expect a higher interest rate.
How Can You Increase Your Credit Score?
The first thing to do before jumping into the new car market is to check your credit score online. Knowing what to expect before heading to a lender’s office will save you time.
Every person in the US is entitled to one free credit report per year from each of the three major credit agencies, e.g., Experian, TransUnion, and Equifax. There’s one caveat.
It’s estimated that 25% of credit reports have incorrect or erroneous information. That’s why it’s best to check your report annually for accuracy.
You are also entitled to a free credit report if you have been turned down for a job or for credit as a result of a credit report.
Payment-Making History
If you make payments on time, you’re more likely to have a good credit score. Missing payments or making late payments will negatively affect your score.
If you’re in the latter group, start making payments on time. Paying additional on the principle is also an excellent way to inch up your credit score.
What’s Your Current Debt?
If you have a large debt load, that will lower your score. Waiting until you pay down your debt before buying a new vehicle is a cost-effective option for obtaining a lower interest rate.
3 More Factors to Consider
These factors are less influential but still play a role:
• The period of time over which you have accumulated debt
• How recently you made a credit application
• If you have revolving credit (credit cards) or installment credit. (Think car loans and mortgages.) Installment credit will be more valuable than credit card debt.
Knowledge is Power but So is Practicality
A good credit score is the key to obtaining new car interest rates. Knowing what your score is puts you in a good negotiating position, if your score is optimal.
If not, you know you have work to do before buying that new car or truck. While it may be tempting to buy a new vehicle at a higher interest rate, let practicality rule here.
If waiting means you get a higher credit score and a lower new car interest rate, there’s something to be said for delayed gratification.
At Joe Bowman Auto Plaza, our car loan rates are as competitive as any of the local banks. And, when you opt for dealer financing, we can typically get you into your new car faster because there’s no third-party paperwork to manage.
