Experian, TransUnion and Equifax now offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com.
With the average new car costing nearly $41,000 in the second quarter of 2024 and the average auto loan interest rate sitting at 6.84%, according to the Experian State of the Automotive Finance Market Report, it's vital to get your credit ready when you buy a car. Doing so could lead to a more attractive interest rate for an auto loan, saving you money over time.
How do you get your credit in shape before buying a car? Some of the steps you can take include checking your credit reports and credit score, lowering credit card debt and paying your bills on time. Ultimately, you want to put yourself in a position to land the lowest interest rate and best terms possible.
1. Check Your Credit Reports and Credit Score
While you can get a car loan with a below-average credit score, you might face a higher interest rate or need to find a cosigner. Checking your credit reports and score might enable you to improve your credit, potentially leading to a lower interest rate and no need to find a cosigner.
You can check your credit score for free through Experian. Review listed risk factors to see what might be hurting your credit score. For instance, your credit utilization ratio, or percentage of available credit you're using on credit cards, might be high due to large credit card balances. Lowering the ratio by paying down those balances could put you in a better position to get attractive terms for your car loan.
You should also check your credit reports from the three credit reporting agencies (Experian, TransUnion and Equifax). This may uncover credit issues that you can fix before submitting a car loan application. You can check your credit reports for free every week at AnnualCreditReport.com.
What if your credit score still isn't in great shape? Making the following moves can help boost your credit score and improve your chances of qualifying for a car loan.
2. Dispute Inaccuracies on Your Credit Report
If you spot inaccuracies on one of your credit reports, you have the right to dispute these items.
Disputing an item on a credit report won't hurt your credit and could help if a mistake that lowered your credit score is erased. For example, if a payment you made on time is reported by the lender as late, it can hurt your credit score.
Contact the credit reporting bureau that reported the error to file a dispute by phone, mail or online. The credit bureau will reach out to the creditor to verify the information. If the information can't be verified or if the error is confirmed, it will be updated or removed from your credit report. If it's verified as accurate, however, it will remain on your credit report.
Inaccuracies that could appear on credit reports and affect your credit score include:
- Accounts belonging to someone else with the same name or a similar name
- Accounts opened by an identity thief
- Closed accounts reported as being open
- Payment wrongly listed as late or delinquent
- Incorrect payment date
- Incorrectly listed account balance
- Incorrectly listed credit limit
3. Always Pay Your Bills on Time
Paying all of your bills on time could pay off in the form of a better credit score.
Your payment history is the most important factor in calculating your credit score, representing 35% of your FICO® Score☉ . If your score is suffering due to late payments, begin by paying any past-due bills.
Once your payments are up to date, consider setting up automatic payments or using reminders on your phone or calendar to help you make on-time payments.
Learn more >> What Affects Your Credit Scores?
4. Pay Off Your Credit Card Debt
Paying off at least some of your credit card debt can help set you up for success when applying for a car loan.
Reducing your credit card debt can bump up your credit score by decreasing your credit utilization ratio. This ratio measures how much of the available credit on your credit cards you're using and ranks second among the factors that determine your FICO® Score.
A credit utilization ratio of 30% or lower can help avoid excessive damage to your credit scores. A high credit utilization ratio raises a red flag for lenders that you're a potentially risky borrower. For top credit scores, keep your utilization in the single digits.
Paying off credit cards decreases your debt-to-income ratio (DTI), which looks at your monthly gross income compared to your regular monthly debts. DTI can signal whether you'll be able to easily handle your loan or credit card payments.
Learn more >> How to Pay Off Credit Card Debt
5. Limit New Credit Applications
Submitting too many new applications for new credit while shopping for a car loan might make it harder to obtain the loan. New credit represents 10% of your FICO® Score.
Applying for credit often results in a hard inquiry, which can temporarily reduce your credit score by a few points. While one hard inquiry normally has little impact on your credit score, several hard inquiries within a short period might cause a lender to perceive you as a risky borrower.
Keep in mind that you can shop around for an auto loan without accumulating numerous hard inquiries. How? If you submit several applications for the same kind of loan within a certain period, credit scoring models typically view these as one hard inquiry. VantageScore® relies on a rolling 14-day period, while FICO uses a 14- to 45-day period depending on the scoring model.
If you want to know what rates and terms you may be able to expect on an auto loan, getting prequalified for a car loan can help you avoid hard inquiries. A prequalification (different from a preapproval and requiring less information from the lender) typically triggers a soft inquiry, which won't affect your credit score.
Frequently Asked Questions
There's no standard credit score for being approved for a car loan; all lenders have different criteria. However, the higher your credit score, the more likely you are to secure a lower interest rate. Ideally, you want to aim for a credit score of at least 700 for better rates and terms.
It's possible to get a car loan with bad credit. In fact, many auto lenders are willing to work with borrowers who have bad credit. However, the lower your credit score is, the higher your interest rate probably will be.
Among the ways to save money for a down payment on a car are:
- Figure out how much you can afford to pay for a car.
- Based on how much you're willing to pay for a car, set a goal of saving a certain amount of money each month to put toward a down payment.
- Review your household budget. Look for ways to cut costs, such as canceling unused subscriptions or dining out less.
- Dedicate a special savings account to money for the down payment, and set up automatic transfers into the account.
The Bottom Line
Getting your credit into shape before you buy a car can help save money in the long run. With better credit, you could be approved for a lower interest rate, which might reduce your monthly payment and loan payoff amount.
To improve your credit ahead of a car purchase, check your credit report and credit score, pay your bills on time and wipe out as much credit card debt as possible. These and other moves can put you in the driver's seat when it comes time to shop for a car loan.