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What credit score is needed to buy a car

A good credit score can mean the difference of thousands over the length of your car loan. Find out what credit score is needed to buy a car AND a system to improve your credit score today.

Ramit Sethi

Your credit score needs to be as high as possible before you buy a car — ideally this means more than 740.

A credit score this high puts you in prime position to get the best interest rates with the added benefit of not having to worry about whether or not your loan will get approved.

You can also save massive amounts of money on your car loan if you have your credit score in check.

How much can you save? Let’s assume you have a credit score of 600. If you improved your credit score by just 60 points, you can save over $2,500 on your car loan.

Surprise! It pays to have good credit.

Improving your credit score can seem very daunting though — especially if you have a really bad one (<600). If that sounds like you, don’t worry. We have a system that can help you improve your credit score and get you an awesome deal on your loan.

What is your credit score?

There are essentially two elements that make up your credit. They are:

  1. Credit report. This is a comprehensive report that gives potential auto lenders basic information about you and your credit usage. This includes things like the number and type of accounts you have open, your payment history, and purchases you’ve made using credit.
  2. Credit score. This is also known as your FICO score, as it was developed by the Fair Isaac Corporation. It’s a single number between 300 and 850 that tells lenders how risky you are to lend to. Auto lenders will look at this number, along with other pieces of info like your salary and age, and make a judgment on your interest rate and whether or not they’ll lend to you at all. That’s why it’s so important that you have as good of a credit score as possible.

Your score comes from the information found within your credit report.

The actual number is determined by the following information and their associated weight in relation to your score (credit score formula courtesy of Wells Fargo):

What your credit score is based on:

  • 35% payment history. How reliable you are. Late payments hurt you.
  • 30% amounts owed. How much you owe and how much credit you have available, or your “credit utilization rate.”
  • 15% length of history. How long you’ve had credit. Older accounts are better because they show you’re reliable.
  • 10% how many types of credit. If you have more lines of credit open, the better your score will be.
  • 10% account inquiries. How many times you have or a lender has checked your credit background.

Your credit score will be within a range of 300 and 850. The range determines whether or not your score is solid — but a good rule of thumb is the higher your credit score, the better you’re off.

If you’re confused, don’t worry. Here’s a handy chart to help you figure out how good your credit score is.

Credit score

It’s also ludicrously easy to find your credit score. In fact, you should do it after you read this article. I suggest starting at Credit Karma or Mint. They’ll find your credit score quickly after you enter in some basic information about yourself (e.g., name, birthdate, SSN).

What credit score is needed to buy a car?

Imagine you want to get a new car that costs $20,000. Your credit score is 680. Not bad but not spectacular either. You decide to put down $5,000 and take out a 48-month auto loan with a principal amount of $15,000. Take a look at how much your monthly payment would be.

48-month new car loan

FICO Score

APR

Monthly payment

Total interest paid

720 – 850

4.008%

$339

$1,259

690 – 719

5.387%

$348

$1,708

660 – 689

7.578%

$363

$2,435

620 – 659

10.411%

$383

$3,404

590 – 619

14.945%

$417

$5,018

500 – 589

15.922%

$425

$5,376

Source: MyFico.

Your monthly payment would be around $363 with a total of $2,435 in interest paid.

But do you know how much you could save if you took the time to improve your credit score from 680 to 720?

$1,176. That’s like getting 5.88% off the sticker price of $20,000.

For example, if your credit score was really bad (~500), you’d save $4,117 if you improved your credit score to 720.

You’d save even more if you’re taking out a used car loan, which typically has a higher interest rate than new ones. Check it out below.

48-month used car loan

FICO Score

APR

Monthly payment

Total interest paid

720 – 850

4.924%

$345

$1,556

690 – 719

6.6%

$356

$2,108

660 – 689

9.089%

$374

$2,948

620 – 659

11.509%

$391

$3,787

590 – 619

16.292%

$427

$5,513

500 – 589

17.549%

$437

$5,981

Source: MyFico.

Using the same principal amount as before ($15,000) we see that we stand to save $4,425 if we improved our credit score from 500 to 720. That’s a HUGE win.

How to improve your credit score

You need a good credit score to get a good interest rate on your loan. I won’t belabor the point.

So here are four things you can start doing today to get a great one:

  1. Delete your debt
  2. Keep your cards
  3. Decrease your credit rate
  4. Automate your finances

Step 1: Delete your debt

Debt is one of the most common factors contributing to a low credit score. It’s also one of the biggest barriers in the way of a Rich Life.

If you want to start earning, saving, and investing more, you need to be debt-free.

Luckily, we have plenty of resources to help get you there. Check them out below.

If you want even more insights on getting out of debt, check out my (very) old video on negotiating your debt.

Step 2: Keep your cards

It’s easy to think that since credit cards are often the source of debt, they need to be canceled in order to get a hold of your finances. That is a myth. Pure and simple.

15% of your credit score is determined by your credit history. That means every credit card account you close is going to negatively impact your credit history.

It also affects your credit utilization rate, which is crucial to getting a great credit score (more on that later).

Of course, there are going to be times when you need to close a credit account. Maybe you can’t afford the yearly fees. Maybe the APR is too high. That’s fine … BUT if you’re planning on applying for a car loan, consider holding off on closing the account until AFTER you get the loan. You want as much credit as possible going into the application process.

Also be sure to put a recurring charge on the ones you don’t use that often. This shows that your card is active and keeps your credit history healthy.

Step 3: Decrease your credit rate

This is also known as the amount you owe, and it impacts 30% of your credit score.

Figuring out your credit utilization rate is simple:

(how much you owe) / (total credit available)

The lower this number is, the better it is for your credit score.

For example, let’s imagine you have $1,000 in debt on two different credit cards. Each card has a $2,500 credit limit. How much is your credit utilization rate?

$1,000 in debt / $5,000 of total credit = .20 or 20%

That means your credit utilization rate is 20%. However, if you closed one of those cards, your credit utilization rate would jump to 40%!

The lower your credit utilization rate is the better. That shows auto lenders that you don’t spend all of the money you have in your available credit — indicating you probably won’t default on your loan and they won’t lose money.

There are two ways to improve your credit rate:

  1. Don’t carry a lot of debt on your credit cards.
  2. Increase the amount of credit available to you.

We’ve already hit the first part — so let’s take a look at a script to help you negotiate your credit limit with your card company:

YOU: Hi, I’d like to request a credit increase. I currently have $5,000 available and I’d like $10,000.

CC REP: Uh … why?

YOU: I’ve been paying my bill in full for the last 18 months and I have some upcoming purchases. I’d like a credit limit of $10,000. Can you approve my request?

CC REP: Okay. I’ve put in a request for an increase. It should be activated in about seven days. Anything else I can do for you?

Use this script to get a credit limit increase every six to 12 months. Only do this if/when you’re out of debt though.

Step 4: Automate your finances

Ahhh automated finances. This is my system to help get you out of debt, save for any huge purchase, and invest passively.

And since 35% of your credit score is determined by your payment history, it’s important to automate your system so you pay your bill on time and in full each month.

For more information on how to automate your finances, check out my 12-minute video where I go through the exact process with you.

Get the first chapter of “I Will Teach You to Be Rich” for FREE

To help you even more, I’d like to offer you something: The first chapter of my New York Times best-seller, “I Will Teach You to Be Rich.”

It’s all about credit cards and it’ll help you tap into even more perks, max out your rewards, and beat the credit card companies at their own game.

I want you to have the tools and word-for-word scripts to fight back against the huge credit card companies. To download it free now, enter your name and email below.

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