Most car shoppers know that their credit score plays a critical role in determining auto loan approval and interest rate, yet many don't understand how that score is assigned. Although a credit score is often thought of as just one number, it is actually much more complex. In order to approach the auto loan process with confidence, it's important to understand which credit scores auto lenders use, how to check your credit, and how to boost your score to get approved for a car loan at a fair rate.

Credit Reporting Models

credit score models

The two major credit scoring models used by lenders include FICO and Vantage. Within both models, there are multiple credit scores assigned to each individual. According to Experian, auto lenders can choose which score they use when evaluating the borrower's credit history, and some may even pull multiple scores to make the final decision. This means you won't be able to predict which exact score the lender will see. 

Both FICO and Vantage look at only one credit report from the three reporting agencies (Experian, Equifax, or TransUnion) to determine a consumer's score. The criteria used to assign a score can vary. For example, Experian states that one credit scoring model might ignore paid collections accounts while another might consider a collections account a negative item even if it's been paid.

fico credit score mix
FICO breaks down a borrower's status into five categories. (source: FICO)

The scoring range for FICO and Vantage is 300-850 and both models take into account similar pieces of data from a borrower's payment history. These fall into the following categories: the amount of debt owed, length of credit history, mix of credit accounts, and new credit inquiries. The weight given to each of these criteria differs between the scoring models, but payment history is the most heavily weighted category among both. It makes up 35% for FICO and 40% for Vantage.

Industry-Specific FICO Scores

The credit modeling companies update their rating systems periodically to keep up with modern behavior and provide the most accurate measure of risk to a lender. In addition to FICO's base credit scores of FICO 8 and 9, the company has industry-specific scores that are optimized for different credit products like credit cards, mortgages, and auto loans. Examples include the FICO Auto Score for car loans and the Bankcard Score for credit cards. The range for industry-specific FICO scores is 250-900 which differs slightly from the base rating system. 

industry specific fico scores(Source: FICO)

According to FICO, "Industry-specific FICO Scores incorporate the predictive power of base FICO Scores while also providing lenders a further-refined credit risk assessment tailored to the type of credit the consumer is seeking". For example, the FICO Auto Scores which are used in the majority of auto financing decisions put more weight on the borrower's payment history with auto loans.

How to Check Your Credit Score

how to check your score

Before applying for a car loan, you should familiarize yourself with your credit score to ensure there are no errors, and that your auto loan offers are fair. With so many different credit score formulas out there, figuring out which score you should track can be confusing.

Checking your FICO Auto Score is ideal because it is used by most auto lenders, but this score is usually only available for purchase. On the other hand, many FICO and Vantage credit scores can be obtained for free through institutions like banks, credit unions, and online financial comparison sites. Even base scores like FICO 8 or 9 will give you a good idea of where your credit stands. 

You should obtain both your FICO and Vantage score before starting the car shopping process, and check for errors that could be bringing down your score. Some car shoppers are cautious about checking their credit because they've heard credit inquires can negatively impact their score. The good news is checking your own credit won't ding you. There are two classifications of credit inquires: hard and soft. Unlike a hard inquiry (a car loan application), a soft inquiry (pulling your own credit) doesn't show up on your credit report or lower your score.

How to Improve Your Credit for a Car Loan

Couple getting car loan

A good credit score makes getting a car loan easier and sets you up to get a better interest rate. If you discover that your score is lower than you'd like, or if you've gotten denied for auto financing, it's time to take action to improve your credit. The best options to boost your credit score quickly are to correct any errors you find and to decrease your credit utilization by paying down credit card balances or getting a credit limit increase.

The long-term strategy to significantly improve your credit involves using credit regularly, making all payments on time, and paying more than the minimum on your bills each month. You should also only open new credit accounts when it's absolutely necessary.

Once you are approved for an auto loan, the car purchase itself can boost your credit, but only if it's a vehicle you can afford. Consistently making car payments on time helps car owners with rocky credit as well as younger owners with little to no credit. By paying your car loan on time every month, you'll see your score climb steadily over the course of your loan term.

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