How Does Your Credit Score Affect Car Loan Interest?

If you use credit, the issuer of that credit will report your account history to the credit bureau. The credit bureaus -- TransUnion, Experian and Equifax -- use this information to create a personal credit report on you. According to MyFico, your FICO credit score is based upon data found in your credit report. Your credit score affects the interest rate you receive on a car loan.

Identification

Your FICO credit score is broken down into five key areas: 35 percent of the score reflects how you pay your bills, 30 percent reflects the level of debt that you have, 15 percent measures the length of your credit history, 10 percent is the amount of new credit recently applied for, and the last 10 percent reflects the mix of credit types present on the report. All five areas are considered in computing the score.

Significance

A FICO score ranges from a low of 300 to a maximum high of 850. The higher your score, the better your credit. Generally, as your score increases, the interest rate you receive gets lower. The lower the interest rate, the less you will pay in interest over the life of the loan. Some finance companies offer zero percent financing, which means you pay no interest at all for the loan; however, only consumers with a high score will qualify for such deals.

Considerations

Prime borrowers, or consumers with high credit scores, receive the best rates from the top lenders. Consumers with poor credit, however, are often referred to as subprime borrowers, which means they have a low credit score or other black marks on their credit report, according to Bankrate, a financial website. Consumers in this category often will not qualify for auto loans from traditional lenders. Instead they may receive loan approval from lenders that cater to those with bad credit. The catch is that these loans often have high interest rates.

Prevention/Solution

According to MyFico, one of the best ways to improve your credit score is to make all of your credit payments on time, since this one factor alone accounts for 35 percent of your FICO score. One single 30-day late payment can drop your score by as much as 110 points, according to Bankrate. The later the payment, the more damages it does to your score. Paying off debt and keeping your balances low can contribute to a better score over time as well.