Managing Credit
Looking for a New Ride? Check Your Credit Score
![approved car loan and key](https://images.ctfassets.net/2n4zt14l2x0s/2iTYYT5MaqzdXspogml50G/e6d27ef59506670837cc52e56022d641/car_approval.jpg?fm=webp&w=1100)
Are you looking to score a new ride? If you’re in the market for a new car, you may need a loan, and car insurance is necessary. Your credit score will significantly determine your ability to qualify for a loan, interest rate, and even your down payment. In most states, insurance companies can charge you higher rates based on your credit score. So, you will need good credit unless you can pay cash for your car or live in a state where the insurer can’t factor your credit score.
Car Loans: Your Credit History Matters
FICO and VantageScore, the major scoring models, have auto loan-specific scores. This score can be different from the credit score you would find because it measures your ability to pay a sizable loan over time. While there isn't a strict minimum score needed for an auto loan, having a good credit history gives you a better chance of getting a great loan deal. Auto loan interest rates can be as high as 21 percent, particularly during higher inflation. A higher score means you're more likely to get better loan terms, like lower interest rates, down payment, and easier approval.
Pro Tip: When an auto dealership runs your credit, they typically get multiple loan approvals from different lenders at various interest rates, and unless your credit is stellar, it’s unlikely you’ll be offered the lowest rate. Although higher interest rates are justified by higher risk, they are more financially lucrative to the dealership and lender (unless you default). Be sure to negotiate to get the best terms.
Car Insurance: It's Not Just About Your Driving History
Credit scores also come into play when it comes to car insurance. We all know that things like your driving record, car type, and the level of coverage you want affect your insurance premiums. But did you know that your credit score can have an impact, too?
Insurance companies use credit-based insurance scores (CBIS) to evaluate how risky it is to insure you. These scores consider your credit history and give insurers an idea of how responsible and stable you are with your finances. The details of how these scores are calculated can vary from one company to another. Still, they generally consider things like your payment history, the amount of debt you have, how long you've had credit, and the types of credit accounts you have.
So, why do insurers care about credit scores? Studies have shown that people with higher credit scores file fewer insurance claims and behave more responsibly. Those with good credit scores might get lower insurance premiums as a reward. Conversely, people with lower credit scores might pay higher premiums because they're considered at higher risk for filing claims. It's important to note that not every state or country allows credit-based insurance scores. Some places, like Massachusetts, Hawaii, and California, have banned them to prevent discrimination. However, in areas where CBIS is permitted, they can affect how much you pay for your car insurance.
Taking Charge of Your Financial Future
Now that you know how credit scores influence car loans and insurance, it's time to take control of your finances! Here are some steps you can take to optimize your credit score:
Get free credit reports to check for any errors and improve your score.
Make consistent payments to build a positive credit history.
Keep your credit card usage balanced and aim for a ratio of under 30%.
Having a mix of different credit accounts can boost your score.
Avoid applying for too many credit cards or loans simultaneously, as it can temporarily impact your score.
If you're going through a tough financial time, look for solutions and seek help when needed.
Follow these tips, and you’ll be in your new car quickly. Until then, public transit can be affordable to meet your transportation needs and help you save in the process;).