You undoubtedly already know that, in the context of strong inflation, costs for new cars have been rising quickly along with many other consumer goods.
According to a recent joint prediction from J.D. Power and LMC Automotive, the average price of a car is predicted to be $45,869 dollars. Rising interest rates, which raise the cost of buying a new car, make the situation much worse.
However, you might have the most control over that component of the purchase (the rate you receive) thanks to your credit score.
This crucial three-digit figure, which is employed in a variety of consumer credit decisions, normally runs from 300 to 850. While you probably already know that higher scores result in lower interest rates for loans, you might not be aware of the savings that can be made as a result.
Based on a credit score of up to 850, as an illustration: A FICO (Fair Isaac Corporation) calculator utilizing information as of August 15 indicates that the average interest rate would be roughly 4.7% if you were to finance $45,000 over five years with a score in the 720 to 850 range. In contrast, the average rate for a score between 500 and 589 is close to 17%.
Dollar-for-dollar, paying more than $16,333 more over the course of the loan at that higher rate ($21,947 for a score below 590 vs. $5,614 for a score of 720 or higher). The graphic below shows how payments and total interest paid increase when credit score declines.
It’s difficult to predict which credit score a lender will use because they have options, but experts advise that regardless of the precise score used, making it a general objective to keep negative items off your credit record can help your score.
“Some of the easiest ways to boost your credit score include checking your credit report for errors and keeping your open accounts in good standing — the latter means that you need to pay all your credit bills on time and in full each month,” Jill Gonzalez, a spokesman and analyst for the personal financial website WalletHub, stated.
“You can also improve your score by keeping unused accounts open, as this helps build a long credit history which is essential for a good credit score,” she said.
Be aware that this three-digit number is not the only factor considered in loan approval, added Gonzalez.
“Lenders don’t only look at your credit score, as it doesn’t tell the full story,” she said. “They will also check your full credit report, as well as employment status, income and other assets or monthly expenses.”
Determine your financial capacity
You may obtain a free copy of your credit report from each of the three major credit reporting companies, Equifax, Experian, and TransUnion, to check for errors and get an idea of what lenders would see if they requested it. Due to the epidemic, such reports are provided every week for free until the end of this year. You can only receive them for free once each year (in average years).
If you’re not sure where to begin, you may determine how much car you can buy with the aid of internet calculators, such as this one from WalletHub.
“After you’ve established that, you can start by contacting local banks and credit unions to find the best interest rate, and see if they’ll pre-approve you,” Gonzalez said.