Getting an Auto Loan: Have You Checked Your FICO Score?
, by Rob Kaufman
Your credit score can have a big impact on your auto loan... in more ways than one. A word of advice: the first thing to do when even thinking about purchasing a car is to check your credit score. The reason? The lower your credit score, the higher your auto loan interest rate, and that could add up to thousands of dollars in additional expense over the life of the loan.
On a positive note, if you have incorrect or outdated information in your credit report that's causing a lower credit score, you can get that fixed with the particular credit bureau - however, it could take 60 to 90 days. And that's why it's so important to check your score (and fix any mistakes with the credit bureau) before you find the car of your dreams and otherwise consider surrendering to a higher interest rate based on incorrect information.
Are the auto loan savings worth the wait?
So you really want this new car, but there are factors negatively affecting your FICO® Score that need to be attended to in order to lower your interest rate. You may be curious whether the savings you'll get with a lower rate are worth the time you'd have to wait before the negative items are erased from your credit report (which may then boost your FICO® Score). See if these numbers help you make the decision...
$25,000 in financing over 5 years
Interest Rate Monthly Payment Total Interest
2% $438.19 $1,291.64
3.9% $459.29 $2,557.14
7.9% $505.71 $5,342.85
It's certainly evident that the savings benefits of waiting for negative items to clear outweigh the two to three month waiting period. Imagine what you could do with a thousand (or two) extra dollars!
Now that you know how your FICO® Score can affect your auto loan...
Let's talk about how your auto loan can affect your FICO® Score.
Credit Mix
One major factor that determines your FICO® Score is the "mix" of credit on your report. (This accounts for 10% of your FICO® Score.) By mix, we're referring to the different types of accounts that make up your credit report. Do you have a decent mix of "revolving" accounts, like credit cards that have a credit limit and a balance that varies each month? What about installment accounts, those that have a set payment and repayment periods, like a mortgage, auto or student loan. Having both credit cards and installment loans with a good history will raise your FICO® Scores as it shows an ability to responsibly manage debt.
Inquiries
Typically, whenever your credit report is requested by a potential lender, a record of that inquiry is placed on it, which can lower a score by as much as 5 points. However, FICO has adjusted its modeling so that multiple inquiries resulting from a consumer's comparing loan terms and costs (acting responsibly by rate shopping) aren't counted if made less than 30 days prior to credit scoring. This allows you to shop for the best loan without worrying about an effect on your FICO® Score.
Account Age
A lengthy credit history allows FICO to better predict your future financial behavior. The "average age of accounts" (AAoA) makes up 15% of your FICO® Score and is calculated as the sum of the ages of each account on your report, divided by the number of accounts. If you don't have much credit history, a new auto loan could have a negative impact on your FICO® Score because it lowers the average age of your accounts. This is why it's important to establish your credit history as early as possible and keep good standing accounts open indefinitely.
One last piece of information that's crucial when shopping for an auto loan: during this time, it is not generally advisable to apply for other types of credit. When you apply for multiple types of credit at the same time, your FICO® Score can drop, potentially making it difficult for you to be approved for the auto loan.
If you want to know how other people are dealing with their auto loan searches, visit myFICO Forums. It's the perfect place to share your own story or get advice about the best way to apply for and manage your next auto loan.
Rob is a writer... of blogs, books and business. His financial investment experience combined with a long background in marketing credit protection services provides a source of information that helps fill the gaps on one's journey toward financial well-being. His goal is simple: The more people he can help, the better.