In the market for a new car? Check your credit score first.

Are you in the market for a new car? Maybe your family is growing and space is an issue, or maybe you’re just ready for a change and that zippy little Mini Cooper is calling your name. Whatever the reason, before you head to a dealership near you, take the time to check your credit score first. I guarantee this will be one of the first steps taken by the dealership, so it would behoove you to arrive armed with this knowledge. Before delving into why, let’s back up and talk about credit scores in general.

As you may know, your credit score is vitally important when shopping for a loan or credit of any kind. Your score tells retailers, lenders, and insurance companies what type of customer you will be and if you will be a good or bad ‘risk.’ When a party lends money they are taking the ‘risk’ that you will pay it back. Your past payment performance is an indicator if you are likely to pay back a loan on time and in full. If you do this, you are a good ‘risk.’ Obviously a credit score does not tell the whole story of who you are as an individual, but it gives retailers a good idea of your payment history so they can make a credit decision while you are still in the store.

Every retailer, lender, insurance company, etc, has a different set of criteria that they look at in regard to your score. Most segment scores into tiers of A+, A, B, C, and D, with A+ being the best and D being the worst. There are a variety of terms surrounding these tiers that you probably have heard: including “A paper” for a score in tier A, and “Sub-prime” or “Special Finance” for C and D tiers.

With that background, let’s take a closer look at why a dealership would want to immediately pull your credit score before starting the car buying process. Most simply: the dealership needs to ascertain how much credit they can extend to you to ensure you are looking at vehicles and vehicle accessories in your price point. In addition, what credit tier you are in will affect your loan amount, interest rate, and financing options.

The consumers in the highest credit tiers will be rewarded with the lowest interest rates. Financing options include the length of the loan term (anywhere from 0-84 months), the loan-to-value ratios (or how much the lender will ask that you put down on the vehicle), debt-to-income ratios (how much the lender will lend to you based on monthly payment amount)and what you can add into the loan as far as optional accessory products. Depending on your score, you may also be able to tap into lender finance specials.

Credit Score Ranges and Rates:

Following is a breakdown of credit scores and equivalent interest rates you can expect to pay for each score. Each score range is associated with an interest rate range. Where your rate falls within this range will be determined by if the vehicle is new or used, past interest rates, and, various other dealership-specific criteria.

A+ 740+: 5.25% - 8.20% This is the highest range of credit scores; consumers in this tier will receive the lowest interest rate, and best available financing options.

A 739-700: 5.85% - 8.35% This tier will still receive low interest rates, but may have restrictions on financing options.

B 699-670: 6.55% - 9.05% This tier will get good interest rates, and will have restrictions on financing options.

C 669-640: 8.45% - 11.45% This tier will have higher interest rates and restrictions on financing options.

D 639- 600: 10.05% - 13.85% This tier will have the highest interest rates and severe restrictions on financing options. This tier may have difficulty finding lenders willing to take the risk of the loan.

To put into perspective how important your credit rating is, let’s look at the bottom line. The difference between an interest rate of 5.25% and 13.85% on a $20,000, 60 month auto loan equates to $5045.51 over the life of the loan. That’s a lot of money.

Walking into a dealership without an approximate knowledge of your credit score is not recommended. Knowing your score means you can make better decisions before ever setting foot on a showroom floor. For example, if your score is low you can make the informed decision to proactively raise your score before investing in a new vehicle, and therefore reduce your interest rate. Or, you can walk in armed with the knowledge of your probable interest rate range and scale back your purchase to ensure your loan term is as short as possible. Meaning you pay off your purchase in a shorter amount of time and mitigate interest charges.

Your first step is getting your hands on your credit report. Everyone is entitled to a free yearly credit report from each of the three main credit reporting agencies – Equifax, Experian, and TransUnion. To order online, visit www.annualcreditreport.com or call 877-322-8228.

If your credit score needs some help, there are measures you can take to raise it. Contact one of the credit reporting bureaus and ask if they can run an analysis of your credit report. This analysis will tell you specific actions you can take to raise your score and on average how much each action will add points-wise to your score. If you are a member of a credit union, they will often take the time to sit down with you and put together a plan to help you improve your score.

Whether you’re ready to buy a vehicle today, or considering a new ride in a few months or years, investigate your credit rating now. Only with this knowledge can you take the steps to improve your score, if needed, and make the smartest decision about all purchases.