What’s the No. 1 way to save money when you buy your next car? Many people think it involves being a savvy negotiator, buying a leftover vehicle from last year, or other things of that nature. While these can definitely help, there’s one factor that could potentially make an even bigger difference: your credit.
Here’s the impact a better credit score could have when you go shopping for your next car, and a few suggestions on how you could boost your score faster than you might think.
Better credit could make more of a difference than you think
The average consumer Opens a New Window. has a FICO credit score of 700, and scores of 660 or higher are generally considered to be “prime” credit. However, there’s a big difference within the prime credit tier when it comes to the interest rates you can expect to pay when borrowing money, and an even bigger difference when it comes to subprime or deep-subprime borrowers.
As of July 20, 2017, here are the national average interest rates for a 60-month new auto loan:
|FICO Score Range||Average APR|
|720 or higher||3.662%|
Let’s say that you want to buy a $30,000 new car with a 60-month loan, and that you have an “average” FICO credit score of 700. Based on the average rates, you can expect to pay a total of $3,981 in interest over the five-year term of the loan. Meanwhile, a borrower with a FICO score above 720 would pay just $2,876 – more than $1,000 less.
In the subprime category, the difference is more extreme. With a FICO score Opens a New Window. of 600, you’ll pay nearly $4,000 more than a borrower with a score of 620.
The takeaway here is that if you have your eye on a new car, and your credit isn’t quite where you’d like it to be, it can be a smart idea to put the purchase on hold and work on improving your score. And as I’ll discuss in the next section, earning a better credit score can be easier than you think.
Three ways to boost your credit score quickly
To be clear, the only way to build excellent credit is by displaying responsible behavior over a long period of time. There’s no shortcut, or secret, to getting a top-notch credit score in a hurry. But getting a relatively small boost in your credit score can potentially be done quickly. Here’s how:
- Pay off some of your debt: This may sound obvious, but if you have a significant amount of debt, particularly on credit cards, paying off a portion of it can be the easiest way to increase your credit score quickly. And if it seems like a burden to turn over hundreds or even thousands of dollars to your creditors all at once, think of it this way: If the effect of the debt repayment is a boost in your credit score, you could get that money back and then some when you buy your car.
- Increase your credit limits: This is one of my favorite credit hacks. Thirty percent of your score comes from “amounts owed,” which includes, among other things, your outstanding debt relative to your total credit limit. One way to reduce this ratio is to pay off debt, as I already discussed. Another way to accomplish this is to call your credit card issuers and ask them to increase your credit line. As long as your balance remains constant, this will reduce your credit utilization, and could boost your score. Consumers report high success rates when asking for limit increases, and the worst your issuer will say is no.
- Let a few credit inquiries fall off: Did you apply for credit nine to 12 months ago? It’s a well-known credit principle than when you apply for credit, it can ding your score. These are known as “hard inquiries” on your credit, and too many of them can be a negative factor. What many people don’t realize is that the FICO formula only considers inquiries from the past 12 months, not from the past seven years like most other credit information. So, if you have a few inquiries, especially if they’re close to hitting the one-year mark, it can boost your score to simply leave your credit alone until they fall off.
Now, there is no way to accurately predict how much these things could move your score, or how long it could take before you notice a difference. Unfortunately, the precise FICO formula is a well-guarded secret. However, even if these get you just a few points, it could be possible to qualify for a lower interest rate than you otherwise would.
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