How to Improve Your Credit Score Before Applying for an Auto Loan
Are you planning to buy a car on credit? One of the most important factors that influences a lender's decision in California is your credit score. It determines whether you will get a loan at all, what the terms of the loan will be, and what interest rate you will be offered. The higher your score, the more favorable the terms are for you.
In this article from Xtreet, we'll share practical tips on how to improve your credit score before applying for a car loan, and how it can help you save thousands of dollars in the long run.
What is a credit score and why is it important?
A credit score is a numerical measure of your financial strength used by banks, credit unions, and other financial institutions. The most commonly used FICO scale is 300 to 850:
- 300-579 is a poor rating,
- 580-669 - below average,
- 670-739 - good,
- 740-799 - very good,
- 800+ - excellent.
The higher the score, the better it is for you, as it means a higher chance of getting approved for a loan, a lower interest rate, and better terms of the contract.
For example, in 2024, the average annualized interest rate for a used car for those with a credit score of 300 to 500 was 21.81%, while those with more than 670 points paid only 9.95%.
Therefore, to get a favorable car loan, it is advisable to have a credit score of 670 and above.
How to improve your credit score before buying a car?
Here are some proven steps to help you improve your credit score within a few months:
1. Check your credit report
First of all, get a free copy of your credit report at AnnualCreditReport.com or through the Credit Karma service. Check it for errors or outdated entries. If you find errors, dispute them, you have every right to do so.
2. Pay your bills on time
Payment history is the most important factor in your rating. Even one late payment can significantly lower your score. Set a reminder or set up automatic payments.
3. Reduce credit card debt
It's ideal if you use no more than 30% of your available credit limit. If your balance exceeds this limit, try to pay off some of your debt before applying for a loan.
4. Do not open new accounts before applying
Each new credit line temporarily lowers your score. It is better to refrain from new credit cards or loans in the next 3 months before buying a car.
5. Do not close old accounts
Even if you don't use an old card, its long credit history has a positive impact on your score. It is better to keep it open.
6. Diversify your “credit mix”
A combination of different types of credit sources, such as credit cards, personal loans, and retail loans, can have a positive impact on your credit score. However, it is important to manage these accounts responsibly.
What to do after buying a car?
After you've bought a car - whether on credit or not - you need to register it, get it titled, or replace the documents. This is where Xtreet comes in.
We'll help you complete the process quickly and safely:
- Car registration,
- Transfer of ownership,
- Replacement of lost or damaged documents,
- Renewal of registration,
- Payment of the relevant fees.
Instead of queuing at the DMV, you can do everything online through the convenient Xtreet service.
Preparing to buy a car is not just about choosing a brand or model. It is also a strategic financial decision. By raising your credit score, you'll get better loan terms. And when you have the car, Xtreet will take care of registration, documents, and all legal formalities.