By now, you probably know that the prices of new cars rose at a rapid pace, as did many other consumer goods, in the midst of high inflation.
According to a recent joint JD Power and LMC Automotive forecast, the average cost of a car is estimated at $45,869. Adding to the sting are rising interest rates, which make the cost of financing a new car more expensive.
However, this aspect of the purchase (the rate you get) is the one you can have the most control over – through your credit score.
More from the “Personal Finance” section:
3 tips to pay off your credit card balance
Drivers pay an average of $702 a month for new cars
26% of Job Changers Regret Joining Great Resignation
This important three-digit number is usually in the range of 300 to 850 and is used in all kinds of consumer credit decisions. While you probably know that higher scores mean higher interest rates on borrowed money, you may not realize how this translates into savings.
For example, based on a credit score up to 850: if you funded $45,000 over five years with an account ranging from 720 to 850, the average interest rate would be around 4.7%, according to FICO (Fair). Isaac Corporation) The calculator uses data as of August 15th. This compares to an average of almost 17% for a score between 500 and 589.
In dollar terms, this higher rate would mean paying more than $16,333 over the life of the loan ($21,947 for a grade below 590 versus $5,614 for a grade of 720 or higher). The chart below shows how payments and total interest paid are higher the lower the score.
While it’s hard to know what credit score a lender will use – they have options – the overall goal of avoiding mistakes on your credit report helps your score, regardless of the specific one used, experts say.
“Some of the easiest ways improve your credit score include checking your credit report for errors and keeping your open accounts in good standing — the latter means you must pay all your credit bills on time and in full every month,” said Jill Gonzalez, an analyst and spokesperson for the personal finance website. WalletHub. .
“You can also improve your account by keeping unused accounts open, as this helps build a long credit history, which is essential for a good credit score,” she said.
Keep in mind that loan approval isn’t just based on that three-digit number, Gonzalez said.
“Lenders don’t just look at your credit score because it doesn’t tell the whole story,” she said. “They will also check your full credit report as well as employment status, income and other assets or monthly expenses.”
To check for errors and get an idea of what lenders will see if they pull your credit report, you can get a free copy from each of the three major lending companies – Equifax, Experian and TransUnion. These reports are available weekly for free until the end of this year due to the pandemic. (In normal years, you can only get them for free once a year.)
If you don’t know where to start, there are online calculators, including one from WalletHub – this can help you figure out how many cars you can realistically afford.
“Once you’ve got that set up, you can start by contacting local banks and credit unions to find the best interest rate and see if they’ll approve you upfront,” Gonzalez said.