Credit scores play an essential role in our financial life. Whether you’re searching for a personal loan, mortgage or credit card, boosting your score can get you more affordable loan options. When it comes to car loans, the same rules apply. Instead of searching for what credit score will merely gain you loan approval, it’s best to figure out what credit score will get you the best deal on your car loan. Let’s learn more.
What’s A Good Credit Score in Canada?
Credit scores are as confusing as they are essential. We’re often left wondering if our credit score is good enough to get us that dream home, car or more. In Canada, a credit score is a three-digit number ranging from 300 to 900. It gives your potential banks, lenders and financial institutions an idea of how financially reliable you are.
If you’re trying to figure out what’s a good credit score in Canada, it’s important to remember that a good score is one that gets you the most competitive interest rates. It also gives you more legroom to shop around if you wish. You can still get a car loan with a bad credit score, but it will end up being a lot more expensive.
Your credit score allows lenders to decide your creditworthiness, and if you’re a risk they’re willing to take on. If you have a bad credit score, you generally present a higher risk, hence why your interest may be a lot higher. When checking your credit score, most lenders and institutions will use the following guidelines:
- Poor 300 – 560
- Fair 560 – 660
- Good 660 – 725
- Very Good – 725 – 760
- Excellent – 760 – 900
How To Check Your Credit Scores & Report In Canada?
It’s essential to check your credit report for errors, to ensure your credit scores aren’t being unfairly pulled down. Thankfully, in Canada, there are multiple sources you can check your credit scores and report for free, including:
- Equifax and TransUnion (Note: TransUnion offers a consumer disclosure which is a file that contains your credit information. Plus, credit scores are only free for consumers in Quebec)
- Third-party credit score providers
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Why Is Your Credit Score Important For A Car Loan?
When buying a car, having a high credit score will help you in many ways. When it comes to the best auto loan rates, they are generally reserved for those who have a good credit score.
Before heading to a car dealership, you must be prepared. Make sure you check your credit report first, so you know exactly what to expect. This way, if your credit score is low, you can give yourself more time to decide on whether you’d like to buy a car now, or with a better credit score. In time, you can then benefit from better rates and get the best deal on your new purchase.
What’s the Ideal Credit Score for A Car Loan?
Auto-loan lenders look for a borrower with a credit score in the mid-600s in Canada. A credit score between 630 and 650 is generally what lenders want to see.
With this, there is some leeway around your credit score requirements when looking to obtain a car loan. Dependent on your lender or bank, sometimes they will be stricter and look for higher credit scores. At the same time, alternative lenders are often willing to accept lower credit scores. Some dealerships can also help borrowers find financing to meet their specific credit needs.
If your credit score is below 630, don’t stress! You can still obtain a car loan. When you’re shopping around, it’s important to keep your mind open to the idea your loan may cost a little more. It can take some time to find a lender that will work your low score. Find out more on obtaining a loan with bad credit here.
How to Boost your Credit Score?
There are many ways you can begin boosting your credit score before you consider applying for a car loan. Check out these guidelines to get you started.
Pay Your Bills On-Time
Since your credit history plays a massive role in your final score, it’s essential to pay your bills on time. If you make sure you at least pay the minimum on your loans and credit cards, and don’t make late payments, this should have a positive impact on your score.
Follow The 30% Rule
If you have numerous credit cards that are all maxed out, this rings alarm bells to your potential lenders. It’s vital to ensure you keep outstanding balances on your credit cards below 30% of your overall limit. This will demonstrate to your banks or financial institutions that you’re not low on cash and that you’re responsibly for handling your finance.
Keep Credit Card Accounts Open
It’s a common myth to think that if you close your credit card accounts, your credit score will increase. That’s not necessarily true. Whereas closing your credit card accounts will help you to fight the temptation of spending, it will affect your credit utilization ratio.
For example, if you have three credit cards and only one is maxed out, you’ve used less of your total available credit limit. But if you only have one credit card that one is maxed out, you have no available credit, therefore your credit utilization ratio is very high and your credit score will be negatively affected.
Written by Grace Gearon from Marble Financial | Contributing Writer for Loans Canada