Your credit score is vitally important to the cost of goods and services that you receive. This score tells retailers, lenders, insurance companies, and more what type of customer you will be by predicting future behavior from past performance. Does this tell the whole story of who you are as an individual? No. It does give companies a quick glance so they can make a decision while you are still in the store, car dealership, etc.
Now that you know why your credit score is being used, let’s take a look at how it affects you.
Every company has a different set of criteria that they look at in regards to your score. Typically, they will segment scores into tiers of A+, A, B, C, and D—A+ being the best and D is the worst. There are a variety of terms surrounding these tiers. For example: “A paper,” “Sub-prime,” and “Special Finance” for C and D tiers.
Since every organization has slightly different criteria for their tiers, I will give you examples of the breakdowns for auto loans. What tier you are in effects the interest rate and financing options available to you. The consumers in the highest tiers will be rewarded with the lowest interest rates. Financing options include the length of the term, anywhere from 0–84 months, the loan-to-value ratios (how much the lender will ask that you put down on the vehicle), debt-to-income ratios, and what you can add into the loan as far as optional products. There may also be finance specials that the lender is offering that are based on credit score.
Credit Score Ranges and Rates
The ranges in interest rates are determined by a new or used vehicle. Be sure, though, to verify the interest rate before purchasing a vehicle. The interest rates are examples only and may move up or down.
(A+) 740 and up: 5.25 percent to 8.20 percent—This is the highest range of credit scores. Consumers in this tier will receive the lowest interest rate and best financing options available.
(A) 739 to 700: 5.85 percent to 8.35 percent—This tier will still receive low interest rates, but may have restrictions on financing options.
(B) 699 to 670: 6.55 percent to 9.05 percent—This tier will get good interest rates, but will have restrictions on financing options.
© 669 to 640: 8.45 percent to 11.45 percent—This tier will have higher interest rates and restrictions on financing options.
(D) 639 to 600: 10.05 percent to 13.85 percent—This tier will have the highest interest rates and severe restrictions on financing options. This tier may have difficulty finding lenders willing to take the risk of the loan.
To put this in perspective, the difference between 5.25 percent and 13.85 percent on a $20,000, sixty-month auto loan equates to $5045.51 over the life of the loan. That’s a lot of money.
Your best defense as a consumer is to know your credit score. If your credit score needs some help, here are a few ways you can bring the numbers up. Contact one of the credit reporting bureaus and ask if they can run an analysis of your credit report. This analysis will tell you specific actions you can take to raise your score and on average how much each action will add points-wise to your score. Another great avenue to take if you are lucky enough to be a member of a credit union—they will often times take the time to sit down with you and put together a plan to help you improve your score.
When you are ready to start the venture in car buying, there are many ways to research vehicles and financing. Cartango has many tools to assist you and is an excellent resource to research and search vehicles.
Updated January 19, 2009