Finance a new car? How much you can save with a great credit score
By now you’re probably aware that prices for new cars have risen at a brisk pace, along with many other consumer goods, amid high inflation.
The average cost of a car is estimated at $45,869, according to a recent joint forecast by JD Power and LMC Automotive. Added to this is the rise in interest rates, which makes the cost of financing a new vehicle more expensive.
Yet this aspect of the purchase (the rate you get) is what you can have the most control over – thanks to your credit score.
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This important three-digit number typically ranges from 300 to 850 and is used in all kinds of consumer credit decisions. While you probably know that higher scores mean better interest rates for borrowed money, you might not realize how that translates to savings.
For example, based on a credit score of up to 850: If you were to finance $45,000 over five years with a score between 720 and 850, the average interest rate would be approximately 4.7 %, according to a FICO (Fair Society Isaac) calculator using data as of August 15. This compares to an average rate of almost 17% for a score between 500 and 589.
In dollars, that higher rate would mean paying over an additional $16,333 over the life of the loan ($21,947 for a score below 590 versus $5,614 with a score of 720 or higher). The table below illustrates how payments and total interest paid are higher the lower the score.
While it’s hard to know what credit score a lender will use – they have options – having a general goal of avoiding bumps on your credit report helps your score no matter which one you use, experts say .
“Some of the easiest ways to boost your credit score include checking your credit report for errors and keeping your open accounts in good standing – the latter means paying all your credit bills on time and in full every month,” said Jill Gonzalez, analyst and gatekeeper. -word of personal finance website WalletHub. .
“You can also improve your score by keeping unused accounts open, as this helps build a long credit history which is essential for a good credit score,” she said.
Be aware that loan approval isn’t based solely on that three-digit number, Gonzalez said.
“Lenders don’t just look at your credit score because it doesn’t tell the whole story,” she said. “They will also check your complete credit report, as well as your employment status, income and other assets or monthly expenses.”
To check for errors and get an idea of what lenders would see if they pulled your credit report, you can get a free copy from each of the big three credit reporting companies – Equifax, Experian and TransUnion. These reports are available weekly for free until the end of this year due to the pandemic. (In typical years, you can only get them for free once a year.)
If you don’t know where to start, there are calculators online, including one from WalletHub – this can help you determine how much car you can realistically afford.
“Once you’ve established that, you can start by contacting local banks and credit unions to find the best interest rate and see if they’ll pre-approve you,” Gonzalez said.