How Does Your Credit Score Affect A Car Loan Interest Rate

I'm always getting asked about how your credit score affects your car loan interest rate. In today's world if you use and apply for credit, the lender that issued you the credit will disclose your credit history to the major credit bureaus. The top three credit bureaus Equifax, Experian and TransUnion will use this data to create a personal history credit report on you. You can't hide anymore if you use credit. The information in your personal credit report is what determines your FICO score. Your personal credit score will affect the rate of interest you have to pay on your loans.

Know The Score

Here is how your FICO score works. It is broken down into five major key areas: 35 percent of the score reflects how you pay your bills, 10 percent is the amount of new credit that you recently applied for, 15 percent calculates the length of your credit history, 10 percent reflects the mix of credit types on your report and 30 percent reflects the level of debt you have. All these ares are taken into consideration when determining your credit score.

Understanding The Scores

Your FICO scores range from a high of 850 to a low of 300. The higher your FICO score, the stronger your credit is. More often than not, as your score gets higher, the rate of interest that you pay will decrease. Only people with a higher score can qualify for loans with a zero percent interest rate from the auto manufactures.

People with premium credit can qualify for the best and most desirable rates from lenders. If you have a bad or lower score, or poor credit, you may only qualify for a sub-prime loan, which means a much higher interest rate. Usually if you fall in this category you can't get approved for auto loans from the traditional lenders.

The Way Out

The best way to raise your credit score is to make all your payments on or before the due dates, as this is the main factor that counts for the largest percentage of your score which is 35 percent of your total FICO score. Listen to this... only one single 30-day late payment can lower your score by as much as 110 points, according to Bankrate. See how important it is to make all of your payments on time. The later you are with your payments, the more it damages your credit rating. Paying off your debt and keeping your balances in line and low can add to your overall credit score.

The lower your FICO score is... the more you will have to pay for your car loan. It's that simple. If you want to keep more of our hard earned money in your pocket, then by all means make your payments on time and keep your debt low.