Having a good credit score eases on a lot of deals for borrowers.
Need to buy a car? Or a house? You need to have a good credit score.
Credit scores- you must have heard about these a lot. And why they’re so important. But have YOU ever wondered why?
Credit scores are a metric that are used to measure the credit worthiness of a borrower. If a person has a high credit rating, it is because they were prompt in returning due credit on time, and vice versa. The higher the credit score, the safer the borrower is, and highly unlikely that they would default on a loan.
Credit scores are important for insurance policies, personal loans, mortgages and other forms of credit to determine how ‘safe’ the borrower is. For you to buy a car, you’re taking a loan from the lender. And before handing you the money, they will evaluate whether you’re a worthy borrower or not and whether you’re a safe investment. And this will be done when they keep your credit scores in check.
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Importance of a High Credit Score
There are a few motivations to pursue a high FICO rating, and every one of them include saving money:
Score lower rates on auto loans: Unless you have enough money to purchase a vehicle outright, you’ll probably need to get an automobile advance. Having a good credit score can help you secure a loan with the best possible terms. Customers with the most noteworthy credit scores meet all requirements for a normal loan cost of 4.2% on another car, contrasted and 14.97% for individuals with the least FICO ratings, as indicated by Experian information.
Get credit cards with great rewards: You can fit the bill for a credit card with pretty much any sort of credit. Yet, the best credit cards regarding prizes and advantages commonly expect great to outstanding credit scores.
Qualify for the lowest rate on a mortgage: Given the measure of cash included, your home loan is the credit you’ll need to get the least financing cost conceivable on. It merits placing in the additional work to search around and arrange, as even a little rate increment can cost you a huge number of dollars over the life of your mortgage. Preparing your credit for a home loan is a basic advance in the home buying cycle.
Negotiate lower interest rates on your credit cards: If you totally take care of your credit card balance every month, your credit APR is insignificant. Yut if you’re carrying a balance, having a great credit score could help your negotiations with your lender to lower your interest rate. Getting a lower interest rate could spare you a great deal of cash.
Improved insurance rates: If you’re looking for mortgage holders or accident coverage rates, having an incredible FICO rating may assist you with fitting the bill for a lower month to month premium- except in certain states where the practice is banned.
Refinance your loans to save money: If you’ve improved your FICO rating since you opened one of your credit accounts, you might have the option to renegotiate it at a lower rate and save cash.
Minimum Credit Score to buy a Car
There is no official minimum credit score in any book that would pinpoint whether a borrower is eligible for a car loan, however, it is important to know what score is considered fair and decent for you to get the loan.
This is the average breakdown to be mindful of:
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
Talking specifically about car loans, borrowers must have a credit above 669 to be able to get a decent deal. This will typically guarantee interest rates under 6%. Auto lenders do accept non prime and subprime customers, however, the interest rates are significantly higher.
What Credit Score is needed to buy a House?
Conventional loans typically require a minimum credit score of 620, though some may require a score of 660 or higher. A jumbo loan is a bigger loan than what you were already getting to finance for luxury homes. This home loan exceeds the maximum limit of conforming loans in the US, and well, good for you, because the more the merrier!
Not only for a house, but any property that may be too expensive for a conventional loan is covered in a jumbo mortgage. So if you want to consider buying a house, only a jumbo loan will cover you.
Of course, since the jumbo loan is a big amount being given to you on a loan, the criteria is obviously very tough. Not everyone qualifies for a jumbo loan, but here are the factors that are considered while loans are given.
- High credit score: You need to have a commendable credit score to be able to qualify for a jumbo mortgage. In some situations a score of at least 700 is required, and in some as high as 720 will make you eligible.
- Cash reserves: You need to have a good amount of cash already in the bank that shows that you will be able to pay back one year worth of mortgage payment. In most circumstances your mortgage lender will ask for bank documents where you can prove your cash reserves.
- Insurance history: This is a relatively minor factor but mortgage companies tip the scale in your favour if you have a good insurance payback record. This will include timely payment of your other insurance policies (health, auto etc) and that none of them have lapsed due to halt in payment.
- Down payment: There is a specific amount of downpayment that you’re required to make, but fortunately these have eased out in the past years. Some time ago, the down payment percentage was about 30% but now it has decreased up to 20%. This has caused a lot of people to be approved for jumbo loans in recent years.
- Debt-to-income ratio: A DTI ratio is the amount of debt you have which is paid from your monthly income. The lower the ratio, more chances of you getting approved for a jumbo loan.
What Credit Score do Car Lenders use?
Car lenders, like any other lender, use FICO credit scores. According to the FICO credit score range, the lowest credit score a person can have is 300. But luckily, most people don’t have a score as low as this.
But a score below 540 is considered bad credit, thus a lot of people are denied loans and credits based on this FICO score. Moreover, the average score that people have in the US is 704. FICO Auto Scores. There are multiple versions of the industry-specific FICO Auto Score, which is created specifically for auto lenders. The FICO Auto Scores are based on a generic FICO Score, and then the score is altered to better predict a person’s likelihood of repaying an auto loan on time. Your history with auto loans could be especially important in determining your FICO Auto Scores.
What Credit Score is needed to buy a Car with no money down?
Almost all auto lenders require that borrowers should give some amount of deposit as down payment, however, there are situations where you could be approved for a car loan without any money down. For this, the lowest credit score that you need is 700, then only you could be considered eligible for it.
Improve your Credit Score to buy a Car
If you have a poor credit score, chances are that you won’t be eligible for a car loan. Then what do you do? If you find absolutely no luck, your only way out is trying again after 6-8 months, and improving your credit score in the meantime.
There are ways that you can improve your credit score to be eligible for an auto loan.
Your payment history is very important while determining the credit score, and the formula is simple: pay off all your credit before the due date. As long as you’re paying off the minimum amount on your credit, you’re set. Even if you miss one payment, you’re suddenly a notch down on your credit history.
Never default. If you default on your credit, you could be in a major problem when trying to fix your credit score. A default reflects poorly on the worthiness of the credit borrower. Thus make sure you’re paying off rent each month or any other due payments, even if it means borrowing from a friend or family member so you don’t miss a payment.
Having a poor FICO score is definitely an issue, because then you can’t get hold of money-saving deals on mortgages, leasing apartments and even on personal auto loans. To give you a car loan, the landlord will definitely look for your credit score as a means to measure if you are worthy of credit.
The real problem starts when bad credit becomes a hindrance in buying your dream car. It may be difficult, but a person with a score below 669 will barely get a car. There are certain ways of doing so like getting a cosigner, paying a high upfront deposit, giving proof of income etc.
And once you get the loan, make sure you’re paying the monthly payment or any other dues before time so that the lender is content that you’re a worthy borrower and this way you can also improve your rating for the future too.