Here's How Your Credit Score Affects Your Monthly Car Payments, FICO Says
It could be a difference of several hundred dollars per month.
When it comes to financial literacy, understanding how your credit score affects different areas of your personal wealth is key. Credit scores can heavily impact a company's decision to offer someone a credit card, certain mortgage rates, or even tenant application approval. It also affects auto loans, and depending on your down payment and auto loan financing, your selection of available vehicles will vary.
RELATED: The Imperfect Credit Score That Makes Banks "Fall All Over Themselves" to Work With You.
While the car shortage is officially behind us, sticker prices and interest rates don't appear to be coming down anytime soon. "You can find the right car that you want now. The problem is, are you going to find the right financing that kind of seals the deal for you?" Ivan Drury, the director of insights at car platform Edmunds.com, told USA Today.
Having an "exceptional" or "very good" credit score can make all the difference in someone being able to afford the monthly payments of their dream car. That's because your eligibility for a lower interest rate is influenced by how high your credit score is. If lenders see you can consistently maintain a high credit score, they may deem you as low risk and offer a better interest rate as a reward.
"On a car loan, the difference between good and bad credit could equate to several hundred dollars per month," Bankrate senior industry analyst Ted Rossman explained to CNBC.
The FICO-Score ranges from 300 to 850. A "very good" credit score is considered to be in the 740 to 799 range. A "good" credit score is a number between 670 and 739. If your credit score is between 580 and 669, that's considered "fair." Anything above 800 is "exceptional," while a score of 579 and under is "poor."
RELATED: 11 Hidden Things That Affect Your Credit Score, Finance Experts Say.
It goes without saying that an exceptional credit score will garner you the best annual percentage rate (APR), while scores closer to the bottom will see higher percentages. As reported by CNBC, here's how FICO is breaking down average APRs.
- 720-850: 7.5 percent
- 690-719: 8.65 percent
- 660-689: 10.42 percent
- 620-659: 12.57 percent
- 590-619: 16.94 percent
- 500-589: 17.8 percent
According to Kelley Blue Book, the average price of a new car is $48,644. Assuming you put 15 percent down and are approved for a 60-month loan, your monthly car payments could range from $829 to $1,045, depending on your credit score tier. Here's the full breakdown for each APR based on FICO's calculations, per CNBC.
- 720-850: $829
- 690-719: $851
- 660-689: $887
- 620-659: $933
- 590-619: $1,027
- 500-589: $1,045
The good news is that credit scores are always a work in progress and can increase with the right steps. "Many credit-building tips are more of a marathon than a sprint: Pay your bills on time, keep your debts low and show that you can successfully manage different types of credit over time," advised Rossman.
And while credit score plays a big role in the auto loan process, it isn't the only factor lenders consider.
"They'll also look at your credit report, your debt-to-income ratio (DTI) (your monthly debt payments relative to your gross monthly income), your employment history and other factors. If your credit score isn't in great shape but your financial profile is strong overall, it could potentially improve your chances of getting a lower interest rate," explains Experian.
