What's Your REAL Credit Score?
In today’s economic times, most folks don’t have tons of cash sitting in their bank account to buy a car outright. Most buyers today finance their vehicle purchase. If you’re in this group and car shopping, you’ve probably already been told to check your credit and score before applying for a loan. What you may not know is there isn’t just one credit score.
Credit Karma
You may be subscribed to a monitoring service like Credit Karma that’s free and provides your credit score weekly. You’ve checked it and feel confident in your ability to get a car loan from your local bank or dealership when you buy a car, only to be shocked and embarrassed when you’re told you’ve been denied for the loan or didn’t get the interest rate you were hoping to get. What happened? The short answer, your Credit Karma score is not the score used by your lender. Credit Karma uses a scoring model called VantageScore, which is a model developed through a joint venture by the three major credit reporting bureaus (Equifax, Experian, and TransUnion). This model is widely used among credit monitoring services and is great at giving you an idea of your overall credit health. However, most banks and lending institutions looking to extend you credit do not use VantageScore. Your VantageScore may be lower or higher than the score used by a lender and should be taken with a grain of salt when applying for credit such as an auto loan. We will talk more about this later.
FICO
If you have heard of or know what your FICO score is, then you’re heading down the right path. FICO was developed by the Fair Issac Corp (hence the name FICO) and has been in use since 1989. It is the most widely used scoring model of banks and lending institutions. As it’s been in use for such a long time, there are many versions of it. At the time of this post, FICO8 is the most widely used general version. FICO9 has recently debuted but hasn’t been widely adopted yet.
“So Mr. Wizard, what you’re saying is I need to know what my FICO8 score is?”
Not exactly. You see, it takes time for banks and financial institutions to integrate and use a newer version of the FICO scoring model because it takes a big investment for them to upgrade. This causes many of them to use older versions for as long as possible. On top of that, there are different flavors of the FICO score available that are more tailored to the type of loan product. As we’re talking car loans, the FICO Auto Score is the one we’ll focus on today.
FICO Auto Score
The FICO Auto Score sometimes referred to as an Auto Enhanced FICO, is a flavor of the original FICO score that’s tuned specifically to weigh items on your credit relating to auto loans more heavily. Let’s say you’ve had some stumbles and missed credit card payments in the past and your FICO score is lower as a result, but you’ve never missed a payment on an auto loan. As a result, your auto score may be higher than your regular score. The opposite is also bee true. If you’ve missed payments on a previous auto loan, your auto score may be lower than your regular score. Why is this important to know? Simple. If you’re applying for an auto loan, your bank or financial institution will likely pull a FICO Auto Score versus a regular score.
Knowing your FICO Auto Score is critical if you plan on financing a car purchase. If you’re working directly with a bank or credit union, ask them which of the three major credit reporting bureaus they use and check your score with that bureau at myfico.com. Myfico is the only place on the web that will give you your FICO score along with your other scores like the FICO Auto Score. It will set you back about $20 to get your report, but well worth it to know exactly where you stand before applying. If you're using dealer financing, knowing your score will give you a better idea of whether you'll qualify for special financing programs often offered on new vehicles.
Dealer Financing
There is a stigma that using dealer financing is more expensive than other forms of financing. If you have a special relationship with your local bank or credit union, you may be able to secure a better rate than the dealership. However, if you have no such relationship established, financing arranged at the dealership is very competitive and sometimes can beat the rates of a local lender. How is that possible? Simple, lenders know a dealership has multiple options to use when it comes to helping a customer secure financing. Therefore, lenders literally compete for your business. They may offer a lower rate to earn your business and keep you from using their competitors.
Wrap Up
Knowledge is power and if you’re one of the many people that finance a car purchase, knowing your credit score is key for your car buying journey. While knowing your score is key, knowing the score lenders are using is critical. I’ve helped dozens of people buy cars and when I learn they’re financing their purchase, I always ask if they know their credit score, their real credit score.
Knowing this information will help you have a realistic expectation of what you'll most likely qualify for when financing your vehicle. Getting a rate you didn't expect is never fun during the car-buying process and can even sometimes push you out of your budget. The great news is you now know how to find out what your real score is so you can be a more informed buyer during your car-buying journey.
Disclaimer: This blog post is not endorsed by, directly affiliated with, maintained, authorized, or sponsored by Credit Karma, MyFICO, VantageScore, Equifax, Experian, or TransUnion. All product and company names are the registered trademarks of their original owners. The use of any trade name or trademark is for identification and reference purposes only and does not imply any association with the trademark holder of their product brand.