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The credit score you need to qualify for an auto loan—much like the minimum credit score you need for a mortgage or any other loan—is up to the lender. Lenders set different eligibility requirements depending on their willingness to accept risk, and their minimum credit score requirements also may vary depending on the size of the loan you're seeking and, perhaps, the type of vehicle you plan to finance.
Banks, credit unions, auto finance companies (including those associated with car manufacturers) and even private dealerships that issue car loans all use credit scores to decide whether to offer you a loan. Computer programs that calculate credit scores, known as credit scoring models, use complex statistics to analyze one or more of your credit reports—records of your money borrowing and repayment history compiled by the national credit bureaus (Experian, Equifax and TransUnion)—to predict how likely you are to pay off your loan. From a statistical standpoint, the higher your credit score, the likelier you are to repay, and the less risky you are as a borrower.
Some auto finance companies prefer minimal risk and insist on borrowers with high credit scores—and offer loans with low interest rates and fees to attract them. Other auto lenders focus on borrowers with lower credit scores, with the understanding that they can charge higher interest rates and fees as a trade-off for accepting greater risk of repayment failure. Many lenders seek a balance of higher-risk and lower-risk borrowers.
Do All Auto Lenders Use the Same Credit Score?
Auto lenders don't just decide for themselves which numerical credit scores may qualify you for a loan—they also get to choose which scoring model to use. Some use the traditional FICO® Score☉ that's also popular among mortgage lenders, credit card issuers and other lenders. Others use a VantageScore® model, which shares the score range of 300 to 850 used by the FICO® Score. Other credit scoring models, including specialty models designed specifically for auto lenders, use different scale ranges.
The FICO Auto Score, for example—a variation on the FICO® Score tailored to predict the risk of default on car payments—uses a score range of 250 to 900. Other specialty scoring models used by auto lenders may have still different ranges.
What Is the Minimum Credit Score Needed for a Car Loan?
All credit scoring models, including those built specifically for auto lenders, use higher scores to indicate greater creditworthiness. But it goes without saying that any given numerical score could mean different things on different scoring ranges. A score of 650 on a scale of 300 to 850 means something different from a 650 on a scale of 250 to 900, for instance.
Without knowing the applicable scale, it's impossible to interpret any credit score correctly. That's why anytime you are denied a car loan or charged an interest rate higher than the best one available when you're offered your auto loan, the lender (or dealer) is required by law to notify you what score you received as well as an explanation of the scoring model that was used and its scale range.
The wide range of credit scoring models and scoring criteria used by auto lenders is one good reason to be sure you shop around when you're ready to apply for a loan. Check with several different lenders (or make sure the dealership's finance office does) to make sure you're getting the best interest rate and payment terms that you qualify for. Applying for a loan typically causes a small dip in your credit score that will recover after a few months as long as you don't miss any bill payments. But credit scoring models, recognizing the importance of comparing offers for the best loan terms you can get, generally treat multiple applications for loans of the same type and amount as a single event, so there's no penalty for shopping around.
How to Improve Your Credit Score Before Applying
While you can't know for certain which scoring model(s) a given car lender will use, it's a good idea to check your credit score before you start applying for auto loans. If your FICO® Score is good or better, you're unlikely to have trouble getting approved for a car loan. If it's in the fair range, you'll likely qualify as well, though you may have to settle for an offer that carries higher interest charges or fees or requires a relatively high down payment.
If you're worried you won't qualify for a loan with good terms, try to improve your credit before applying for a car loan. Here are some suggestions for improving your credit, which will tend to bring improvements on any credit score, regardless of the model used:
- Pay your bills on time. Even one late payment can hurt your credit score significantly. Ideally, you should try to be sure your recent credit history (the last 12 months, at least) is free of late payments before you apply for a new loan.
- Pay down outstanding credit card balances. Credit scores are highly sensitive to your credit utilization ratio—the amount of credit you're using relative to your total credit limits. To figure out your utilization rate, divide your total credit card balances by your total credit limits. The lower your utilization, the better. If you currently have a utilization rate over 30%, paying down credit card balances could be a quick way to increase your credit scores. For the best scores, keep your utilization under 6%.
- Keep credit card accounts open. Closing accounts, even on a card you never use, will lower your available credit and increase your utilization rate. If you're trying to get rid of a card to avoid paying its annual fee, try to hold off until after you've secured your car loan, and then wait a few months and apply for a new (no-fee) card with a spending limit equal to or greater than the card you want to close to avoid reducing your overall borrowing limit.
- Hold off on other loan applications. Whenever you apply for a new loan or take on additional debt, your credit scores dip. So it may be best to avoid new credit card or loan applications until after you buy a car.
- Consider consolidating credit card debt. If you can't afford to pay down your credit card balances, you could apply for a debt consolidation loan and use the money to pay off your credit cards. Installment loans, such as personal loans, don't affect your utilization rate, so transferring debt from credit cards to a personal loan could improve your scores—as long as you don't then charge up those cards again. Personal loans typically charge lower interest rates than credit cards as well, so this move can be a money-saver too.
- Check your credit reports for errors. Double-check your reports from the three credit bureaus for errors that may be hurting your scores and file a dispute if you find one. The credit bureau must investigate your claim and either validate, update or delete the information.
- Consider enrolling in Experian Boost®ø: This program allows you to share utility and phone payment information so it can be factored into your FICO® Score based on data from Experian. Many individuals see an instant increase in those scores, and that could benefit you with some auto lenders.
These actions could improve all of your credit scores, which can make it easier to get approved for an auto loan with a favorable rate.
Keep Your Eyes on the Road
The variety of credit scoring options and lending standards in use by auto financers and other lenders can make the road to a car loan seem treacherous and twisty. But if you check your credit report and score, take a few steps to polish up your score if you need to, and shop around for the best loan you can get, you'll find you can navigate the process easily, and you might even get a great deal in the bargain.