How Average Are You? Car Loans, Mortgages, and Credit Scores

If you're thinking of buying a car or a house, you might be wondering how your credit score will affect your financing options. Your credit score is a numerical representation of your credit history and how well you manage your debt. It can range from 300 to 850, with higher scores indicating lower risk for lenders.

Your credit score can influence the interest rate, loan amount, and loan term you qualify for when you apply for a car loan or a mortgage. In this blog post, we'll look at the average credit scores for car loans and mortgages in the U.S., and how you can improve your chances of getting the best deal possible.

Average credit scores for car loans

According to Experian's State of the Automotive Finance Market report for the first quarter of 2023, the average credit score for a new car loan was 742, while the average score for a used car loan was 677. The report also shows that the average interest rate for a new car loan was 6.58%, while the average rate for a used car loan was 11.17%.

As you can see, your credit score can make a big difference in the cost of borrowing money for a car. For example, based on Bankrate's auto loan calculator, if you borrow $20,000 for a new car with a 60-month term, your monthly payment and total interest paid would vary depending on your credit score:

        Credit score | Monthly payment 

                781-850 | $384 
                661-780 | $391 
                601-660 | $415 
                501-600 | $449
                300-500 | $473 

Source: Bankrate.com

As you can see, having a higher credit score can save you thousands of dollars in interest over the life of the loan. To get the best rates, you'll need a credit score of at least 661 or above, according to Experian. However, you can still get approved for a car loan with a lower score, but you'll have to pay more in interest.

Average credit scores for mortgages

Similar to car loans, your credit score can also affect your mortgage options. According to Experian's State of the Mortgage Market report for the first quarter of 2023, the average credit score for a conventional mortgage was 759, while the average score for an FHA mortgage was 678. The report also shows that the average interest rate for a conventional mortgage was 3.25%, while the average rate for an FHA mortgage was 3.50%.

A conventional mortgage is a type of home loan that is not insured or guaranteed by the federal government, while an FHA mortgage is a type of home loan that is insured by the Federal Housing Administration (FHA). FHA loans are typically easier to qualify for than conventional loans, but they have lower loan limits and higher mortgage insurance costs.

Your credit score can affect not only your interest rate, but also your down payment and loan amount when you apply for a mortgage. For example, based on NerdWallet's mortgage calculator, if you borrow $200,000 for a 30-year fixed-rate mortgage, your monthly payment and total interest paid would vary depending on your credit score and loan type:

    Credit score | Loan | Monthly payment 
      760-850 | Conventional | $870 
      620-639 | Conventional | $1,021 
      760-850 | FHA                     | $898 
      580-619 | FHA                     | $1,050 

Source: NerdWallet.com

As you can see, having a higher credit score can save you tens of thousands of dollars in interest over the life of the loan. To get the best rates, you'll need a credit score of at least 760 or above for a conventional mortgage, or at least 580 or above for an FHA mortgage, according to Experian. However, you can still get approved for a mortgage with a lower score, but you'll have to pay more in interest and possibly a higher down payment.

How to improve your credit score

If your credit score is not in the best shape, don't worry. There are some steps you can take to improve it over time and increase your chances of getting better financing options for your car or home purchase. Here are some tips to boost your credit score:

- Check your credit reports regularly and dispute any errors or inaccuracies that might be lowering your score.
- Pay your bills on time every month and avoid late or missed payments, which can hurt your score significantly.
- Keep your credit utilization ratio low, which is the percentage of your available credit that you're using. Aim to use no more than 30% of your credit limit on any card or account.
- Maintain a good mix of credit types, such as credit cards, installment loans, and mortgages, and avoid opening too many new accounts at once, which can lower your average age of accounts and generate hard inquiries on your credit report.
- Monitor your credit score and track your progress over time. You can use free tools like Credit Karma or Experian Boost to access your credit score and get personalized recommendations on how to improve it.

Conclusion

Your credit score is a key factor in determining your financing options for a car or a house. The higher your score, the lower your interest rate and the more money you can save in the long run. However, even if your score is not perfect, you can still get approved for a car loan or a mortgage with some lenders, but you'll have to pay more in interest and fees.

To improve your credit score, you should check your credit reports regularly, pay your bills on time, keep your credit utilization low, maintain a good mix of credit types, and monitor your credit score over time. By following these tips, you can boost your credit score and get closer to your car or home ownership goals.

References:

- Experian State of the Automotive Finance Market Q1 2023
- Experian State of the Mortgage Market Q1 2023
- Bankrate Auto Loan Calculator
- NerdWallet Mortgage Calculator

CAR LOANS & MORTGAGES

1. cars.usnews.com2. nerdwallet.com3. nerdwallet.com4. marketwatch.com5. caranddriver.com6. forbes.com7. bankrate.com8. nerdwallet.com

CREDIT SCORES