What Credit Score Do You Need To Get Pre Approved For A Mortgage – You’ve shopped for cars, gone on test drives, and found the perfect car. But will you qualify for a car loan? Before being approved, the lender pulls your credit report to determine your creditworthiness. Your credit report and credit score help them decide whether to give you a loan and at what interest rate.
Lenders can choose between multiple credit scoring models and multiple credit bureaus. So what kind of credit score do car dealers usually use?
What Credit Score Do You Need To Get Pre Approved For A Mortgage
When you apply for a car loan, the lender may use one version of the following credit scores: FICO® Auto Score, Base FICO® Score, or VantageScore®. FICO® scores are used by 90% of the top lenders, and VantageScore® credit scores are used by nine of the 10 largest banks.[1][2]
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FICO® Auto Scores are industry-specific scores that focus on the likelihood of auto loan defaults. For example, late payments on past auto loans (or other negative data) can hurt your FICO® auto score more than other derogatory items.
Instead of the traditional credit score range of 300-850, FICO® Auto Scores have a scale of 250-900. A higher FICO® Auto Score indicates less credit risk—just as a higher score means less risk in other credit scoring models. With a higher score, you’re more likely to qualify for car financing and get a better interest rate based on each car lender’s criteria. Each individual lender also determines what other financial information they will consider in the loan review process.
Lenders use multiple versions of the FICO® Auto Score. (Think of the many versions of smartphone software and how some users will upgrade their operating systems while others continue to use older options.)
The newest version (as of this writing) is FICO® Auto Score 10, introduced in 2020. However, many auto lenders still use FICO® Auto Score 2, FICO® Auto Score 4, FICO® Auto Score 5, and FICO® Auto Score. 8.
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Baseline FICO® scores predict how likely you are to default on any loan obligations within the next 24 months. They have a traditional range of 300-850 points.
Lenders use multiple versions of the basic FICO® Scores. FICO® Score 10 is the latest (as of this writing). However, FICO® Score 8, introduced in 2009, remains the most widely used version.[3]
In 2006, a new credit scoring option became available – VantageScore®. The VantageScore® credit score is a collaboration between the three major credit bureaus.
The two most recent versions of the VantageScore® credit score (3.0 and 4.0) have an industry standard credit score range of 300-850. Older VantageScore® models ranged from 501 to 990.[4]
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VantageScore® is becoming increasingly popular with auto lenders. The 2019 VantageScore® Market Study Report revealed that auto lenders used 131 million VantageScore® credit scores between July 1, 2018 and June 30, 2019.[5]
Your credit score will vary depending on the credit scoring model and credit bureau. Various companies will often release their credit scores to you for a fee. For example, you can get FICO® Score 8 for free from Experian or VantageScore® 3.0 for $7.95. Equifax will release the FICO® Score 5 based on its report for $14.95 per month, and TransUnion will share the VantageScore® 3.0 based on its report for $24.95 per month.[6] VantageScore also provides free credit score reports from certain providers.[7]
FICO® offers 28 FICO® Scores, including auto, mortgage, and credit versions, as well as an “advanced” plan that provides three bureau credit reports and other services for $29.95 per month.[8] FICO® offers other plans as well, so if you think you need the service, be sure to check out the pricing page to determine the best option for you. You can also request a free copy of your credit report every 12 months from each credit reporting company at annualcreditreport.com.[9]
Even if you don’t know what model your lender uses, it’s important to understand roughly what your credit score is and how that will affect your interest rate.
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There are three major credit bureaus that compile your credit history into credit reports: Equifax, Experian, and TransUnion. Lenders can use any credit bureau to determine your creditworthiness.
There is no definitive answer as to which credit bureau is most commonly used for car loans, and each lender’s reporting to each credit bureau can vary based on several different factors. Most lenders are not required to report to each credit bureau, which may mean that there is no guarantee that your credit information will be the same across all three credit bureaus.[10]
Lenders will look at your credit score to determine whether to approve a car loan application, but it’s not the only factor. They will also consider your debt to income ratio; personal information such as how long you have worked at your current address or current employer; and the size of the down payment you wish to make.[11]
You can still buy a new car with bad credit, but if you’re approved, the above factors will affect your loan terms, the size of your monthly payment, and your interest rate. Remember to consider your budget and evaluate used car options. While a luxury car may look attractive, a functional used model may be a better fit for your budget and credit rating.[12]
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According to the Consumer Financial Protection Bureau (CFPB), your credit score is one of many other factors that can affect your interest rate. Your interest rate can vary based on your credit history, loan amount, type of car you buy, and loan term.[13]
If you are in the “fair” or “very poor” credit score range, you can try to improve your score before applying for a car loan. Borrowers with fair credit may be considered subprime borrowers and may not get the best terms if their credit is approved. Those with very poor credit may be denied outright, or face high loan rates and additional fees even if approved.
This chart details the average interest rate on a loan account for a new or used car loan. Based on Experian’s latest data for Q4 2021, you can see that it classifies borrowers into five risk categories based on their credit scores: deep subprime, subprime, nonprime, prime or super prime.[14]
Disclaimer: All rates are subject to change and lenders may have different categories and scoring models. Please use this strictly as a guide.
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A lender may view a borrower with a low credit score as a higher risk and require a higher down payment. This can work in your favor as you will have a smaller loan to pay off. If you can afford a large down payment, you can save some money by paying less overall interest, even at a higher rate.
Before you decide to buy a car, it’s helpful to understand the factors that affect your credit score. You can then tailor your financial activities to help you build credit.
Your payment history is the most important factor in your credit score, accounting for 35% of your FICO® Score. Making your loan payments on time—whether it’s personal loans, student loans, or payments to credit card issuers—is an important step in improving your credit score.
Your credit utilization ratio is the second largest factor in calculating your FICO® Score, accounting for 30%. This is the amount of credit card debt on all of your credit cards divided by their combined credit limit.
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If you owed $2,000 on three credit cards with a total limit of $5,000, your credit utilization would be 40%; Experts suggest keeping it below 30%. Having a higher credit utilization can negatively affect your credit score and lenders may see you as a potentially risky borrower.[15]
Errors on credit reports happen more often than you might think. Numbers are transferable; accounts may be misreported as open, delinquent or delinquent accounts; balances may be impossible; and fraud may occur. An FTC study found that 1 in 4 consumers found errors on their credit reports that could affect their scores.[16]
Fortunately, you can dispute any errors that are inaccurate. You can order a free copy of your credit report at annualcreditreport.com to check for any suspicious entries.
New loans or applying for new loans can affect your credit score. When you apply for a new loan, an inquiry is placed on your credit report by one of the three major credit bureaus. Depending on which bureau the lender uses and other factors on your report, this inquiry could lower your score by several points. However, according to FICO®, if you apply for multiple car loans within a short period of time (typically 45 days), it will only count as one hard inquiry; this principle also applies to shopping for a mortgage loan.[17]
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If you think you’ll be in the market for a car, it’s a good idea to build your credit ahead of time. Focusing on general credit habits can be more helpful than trying to get a specific score. Building credit takes time, so be patient and
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