Your credit score influences the car loan terms you're able to qualify for. Better scores mean better interest rates and more available options for consumers. A bad credit score can mean you won't qualify for the rates you want, or possibly at all. If you need to build credit for an auto loan, there a few different strategies you can use to help your chances of qualifying.
8 Ways to Build Credit Before an Auto Loan
Whether you need to qualify to begin with or want to unlock better terms, taking some time to improve your credit score before applying for an auto loan can be worth your while. You can build your credit score for a car using the following eight tips:
- Pay Bills on Time – Your payment history accounts for 35 percent of your FICO credit score, making it the most impactful factor. Therefore, the best way to build credit is to pay all of your bills on time and in full. Over time, this helps you establish a strong payment history, which lenders like to see.
- Get Current on Late Payments and Collection Accounts – In the same vein, catching up on any late payments or delinquent accounts can pay dividends. These items get marked as paid on your credit reports, which certainly looks better than 30- or 60-day delinquencies.
- Reduce Credit Card Balances – Another great way to raise your credit score is to bring down your credit card balances. The percentage of your card limits that your balances account for is known as your credit utilization ratio. This makes up a large part of the "amounts owed" portion of your credit score, which accounts for 30 percent of it. The general rule of thumb is to keep your balances at 30 percent or less of your credit card limits, or else your score is negatively impacted. Therefore, reducing balances below this mark, or eliminating them altogether, goes a long way when it comes to improving your credit score.
- Get a Credit Card or Secured Credit Card – It takes credit to build credit. It's much easier to improve your credit score if you have credit accounts to manage responsibly. A credit card or two can help establish a strong payment history if you always pay them on time, and it can help you practice responsible utilization if you keep the balances low. If you don’t have a credit card or can't qualify for one, a secured credit card is easy to qualify for and works like a regular credit card. The only difference is it requires a deposit to open, the amount of which becomes your credit limit.
- Be an Authorized User – If you can't get or don’t want your own credit card, becoming an authorized user on somebody else's can provide a similar credit-building effect. In this arrangement, you're listed on someone’s credit card account. This allows you to benefit from their payment activity, its credit utilization, and the account age.
- Don't Close Old Accounts – Closing old credit card accounts can hurt your credit score. This could remove the positive payment history associated with the account off of your reports, which could drop your score. Getting rid of accounts also affects your credit utilization, and your score can drop if it's worse afterward. Finally, it also shortens the average age of your credit accounts, and the age of your credit makes up 15 percent of your FICO score. For these reasons, it's better to keep your older existing accounts open, even if you don't plan on using them.
- Limit Credit Applications – While it takes credit to build credit, you don't want to apply for too many other types of credit in the months leading up to your car loan. Having a lot of recent hard inquiries on your credit reports can be viewed as a red flag. To a lender, it may make it seem like you're relying too much on credit if you're so anxious to get more of it.
- Look for Errors on Your Credit Reports – Another way to improve credit for a car is to carefully look over your credit reports for inaccurate information. You can dispute errors with the reporting bureau, which they remove if you're found to be right. A credit bureau has to investigate the matter, and if the creditor respond within 30 days, the negative mark is automatically removed. If the errors are negatively impacting your score, getting them removed can raise your score.
What Credit Score is Needed to Qualify for an Auto Loan?
If you need to improve your credit for a car loan, you're probably wondering what score you should be aiming for. Unfortunately, there's no simple answer to the credit score needed to qualify for an auto loan. While most lenders do have a minimum credit score requirement, it varies from lender to lender and depends on your overall borrowing profile and the loan programs the lender offers.
If you're dealing with less than perfect credit and need a car loan, there are subprime lenders that offer bad credit financing. Their credit score requirement is lower than traditional lenders because they place more importance on other factors, like your income and residence stability.
The Car Connection can help consumers find financing, even if they're facing credit problems. We work with dealerships all across the country that are teamed up with subprime lenders to remove the challenges of getting an auto loan. Let us match you with a local dealer to do the car buying process right. Get started right now by submitting our secure car loan request form online.