By now you probably know that prices for new cars have risen at a rapid pace, along with many other consumer goods, amid high inflation.
The average cost of a car is an estimated $45,869, according to a recent joint forecast by JD Power and LMC Automotive. In addition, rising interest rates make financing a new vehicle more expensive.
But that aspect of the purchase (the rate you get) is what you may have the most control over – through your credit score.
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That important three-digit number typically ranges from 300 to 850 and is used in all kinds of consumer credit decisions. While you probably know that higher scores mean better interest rates on borrowed money, you may not realize how that translates into savings.
For example, based on a credit score up to 850: If you were to fund $45,000 in five years with a score in the range of 720 to 850, the average interest rate would be about 4.7%, according to a FICO (Fair Isaac Corporation) calculator that uses data from August 15. That corresponds to an average percentage of almost 17% for a score between 500 and 589.
As for the dollar, that higher rate would mean paying more than $16,333 over the life of the loan ($21,947 for a score below 590 versus $5,614 for a score of 720 or above). The chart below illustrates how payments and total interest paid are higher the lower the score.
While it’s hard to know what credit score a lender will use — they have options — there’s a general purpose to avoid dents on your credit report, your score, regardless of the specific one being used, experts say.
“Some of the easiest ways to increase your credit score include checking your credit report for errors and keeping your open accounts in good standing — the latter means paying all your credit bills on time and in full each month,” said Jill Gonzalez, an analyst and spokesperson for the Personal Finance website. WalletHub .
“You can also improve your score by keeping unused accounts open, as this helps build a long credit history that is essential to a good credit score,” she said.
Keep in mind that loan approval isn’t just based on that three-digit number, Gonzalez said.
“Lenders don’t just look at your credit score because 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.”
To check for errors and get an idea of what lenders would see if they requested your credit report, you can: get a free copy from each of the three major credit reporting agencies – Equifax, Experian and TransUnion. Due to the pandemic, these reports are available weekly free of charge until the end of this year. (In typical years, you can only get them for free once a year.)
If you’re not sure where to start, there are online calculators — including one from WalletHub – that can help you figure out how much car you can realistically afford.
“Once 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.