Buying a car is a commitment that comes with lots of expenses. Between maintenance, monthly installments, and insurance premiums, you’re investing a lot into owning a vehicle. A low credit score can make securing a loan more difficult, but it may also increase the cost of the loan. It’s important to factor in all financial aspects of ownership as you prepare to take this next big step.
How Is Your Credit Score Calculated?
Your payment history has the biggest impact on your credit score. It makes up for 35% of your score, followed closely by your credit utilization. The reason these two indicators are weighted so heavily is they give the clearest picture of your ability to pay back loans on time.
Other factors that determine your credit score include the duration of your history, the number of recent inquiries and the variety of accounts you have. A lengthy credit background shows an ability to manage financial obligations for extended periods of time, while multiple inquiries at once may hurt you. If your credit is a good mix of credit cards, mortgage and auto loans, you may be in a better position than if all of your debt stems from credit cards.
What Is the Auto Insurance Score?
Your Auto Insurance Score represents your risk potential as a driver. The AIS is typically assigned by insurance companies in order to assess the likelihood of your filing a costly claim.
Although your driving record and auto claims history are both considered in the calculation of this number, neither is surprisingly the highest priority. Insurers use your credit report as the key source to figure out your AIS. This may seem counterintuitive, but studies support the practice of correlating driving risk and credit history.
The main point that insurers are concerned with is the amount of financial liability you’ve taken on in the past. Unlike mortgage companies, they don’t care as much about your current income or job history. Taking all this information into account, your credit score can be a major predictor of your AIS.
How Does Bad Credit Impact Your Insurance Premiums?
Insurance companies use your AIS to determine your premiums. This amount is meant to offset the company’s risk if you end up filing a claim. Because the AIS is heavily related to your credit score, it stands to reason that a low score may raise your monthly premium. Some agents may even deny you coverage if they decide the risk of taking you on as a client is too great.
Not all insurance companies use an AIS as part of their underwriting procedure, but many do. To get the most-comprehensive coverage at the lowest rate, it’s wise to focus your attention on improving your credit. In addition to elevating your AIS and lowering premiums, better credit can help you pay less for your car in the long run.
What Effect Does a Low Score Have on Your Loan?
The higher your down payment, the lower your monthly payments will be. If you have poor credit, then the lender may ask for a higher down payment on the car. The remaining balance must be paid out via an auto loan. The interest rate is what determines how much more you’ll pay beyond the principal amount. Lenders arrive at this percentage based on several factors:
Though the last three in this list are considered, your credit score is by far the most important. The difference between an interest rate for a candidate with good credit versus bad credit can be significant. Those with exceptional history may secure rates of less than 3% , while those who have struggled may pay over 15%.
The good news is that you may be able to use your auto loan to improve your credit score. By keeping up with payments and repairing your credit, you can consider refinancing down the road to get a better interest rate.
How Can You Improve Your AIS and Your Credit Score?
Because your credit score is a combination of many factors, understanding it can be a complicated process. Despite a long list of positive contributions, you may have a lower score because of one negative item. You might even have items on your reports that are unfair or inaccurate, resulting in a significant decrease in your score.
The first step to turning things around is to do an in-depth review of your reports. You can enlist the help of credit professionals to help you. They can work with creditors and reporting agencies on your behalf, so that inaccurate information can be taken off your reports. What remains are aspects of your score you can take control of: payment history, credit utilization, and new credit inquiries. There are several adjustments you can make to your financial habits that may help improve your score:
What Score Do You Need to Buy a Car?
Ultimately, there is no set number you need to reach in order to be eligible for an auto loan because each lender has different requirements. Just keep in mind that the lower your score, the more you may end up paying on the loan. Insurance companies might charge you more per month, and your interest rate will likely be higher.
If you want to save on these costs, make credit repair a priority. Improving your credit can make you a more attractive candidate for lenders and may award you better premiums and interest rates. To start this process, sign up with Lexington Law Firm to help you work towards achieving your goal of buying a new car.You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.
Article updated May 8, 2018.