If you can afford to buy a car outright—without getting a loan—you don’t need to worry about your credit score. But if you need financing for your purchase, as so many people do, your score can have a big financial impact. Here’s what you need to know about scores and how you can improve yours if your car shopping plans are down the road.

There’s a difference between the credit score you need and the one that will net you the best deal. It is always in a dealership’s advantage to sell you a car, so the salespeople are going to do everything in their power to secure financing for you, albeit sometimes at ridiculous interest rates. 

A better question is: what credit score do you need to get a good deal on an auto loan? 

Typically, a credit score of 700 or higher will put you in a good position to find favorable loan terms. If your credit score is lower, you will probably be offered a higher interest rate. And the lower it is, the more you’re likely to pay. 

Here’s an example. Dan and Brad are both shopping for used cars. They have $2,000 to spend and want to pay off the loan in three years. They both settle on the same $10,000 model, and the dealership happens to have two of them. 

The only difference between Dan and Brad is their credit score: Dan’s is 750, while Brad’s is 620. Because of this, Dan can secure a loan with a 4.5% interest rate, while Brad can only get financing at an 8.5% interest rate. Over the three years, Brad will end up paying $524 more than Dan will for the same vehicle. The monthly payment for Dan will be $238, versus Brad’s $253. 

The additional burden would be even greater on a bigger loan. On a five-year loan for $25,000, for instance, the same credit scores and interest rates would mean Brad had to pay $2,810 more than Dan over the life of the loan.

Loan Rates by Score

People with a credit score of 661-780 averaged a rate of 5.17% for a new car loan and 6.54% for a used car loan in the second quarter of 2019, according to data from the credit bureau Experian. Those with a score higher than 780 had rates of 4.23% and 4.77% (new vs. used,) and people with a score of 601-660 secured 8.12% and 11.38%. Borrowers with 500 or lower saw an average rate as steep as 20%. 1

Overall, car buyers had an average credit score of 717 on loans and leases for new cars and 656 on loans for used vehicles, according to Experian.2

Data crunched by U.S. News & World Report in October 2019 slices it a bit differently. Those with a credit score of at least 700 can expect to secure an interest rate of just over 4%, while people with a score of 650-699 can expect a rate in the 7% range, the magazine said.3

How a Credit Score is Calculated

Perhaps you’re wondering how you get assigned this important three-digit number. In the U.S., Experian and the two other credit reporting bureaus–Equifax and TransUnion–keep track of your borrowing in regularly updated credit reports. Your credit score is essentially a snapshot of these reports, a way for lenders to quickly and consistently consider how well you’ve handled your loans in the past.

To find out your score, check with the credit bureaus or use a third-party provider like Credit Karma or Credit Sesame. Many banks and credit card companies will also give you access.

There are a number of different credit scoring systems, and even within the same system, scores can vary depending on which bureau’s credit report is used. Fair Isaac Corp.’s generic FICO scores are the most widely known, but auto lenders also use industry-specific FICO scores as well as VantageScores.  

How to Improve Your Credit Score 

There are a number of different factors that go into credit score calculations. With patience and discipline, you’re likely to improve your score if you follow some simple guidelines: 

  • Pay at least the minimum payment on all of your credit card loans, and don’t be late. One of the biggest factors in your credit score is your history of paying on time.4 While you should ideally pay your entire bill every single month, this isn’t always realistic. At the very least, always pay what you owe. 
  • If you’re maxing out your credit cards, it’s a sign to lenders that you’re strapped for cash. Try to keep your outstanding balances on loans to below 30% of your overall credit limit by paying down your debts. 5
  • Don’t close old credit cards. If you have old credit cards that you aren’t using, it’s still a good idea to keep them. Closing old accounts can hurt your score by both shortening your average account age and reducing your overall credit limit. 
  • When you’re ready to buy a car, deal with that first before you consider financing for anything else. It’s also best to do your rate-shopping relatively quickly so it doesn’t look like you’re applying for a bunch of new loans.5  6

Bottom Line

Besides your credit score, lenders will consider your income, how much you have for a down payment and the size of the loan you’re seeking. Remember, no matter how tempting it may be to go with a fancier car, you have to be able to afford your monthly payments. After all, being late or overdue will only hurt your credit score and your chances of better rates on future loans.