The Difference Between a Good and Bad Credit Score

I get this question several times a week and normally avoid the question but because this time it came from a Minter I’ll tackle it.  Here’s the question…

“Hi John. We are going car hunting in the next month to replace a 10 year old junker. We may or may not need financing but at this point I’m keeping all of my options open.  I’m going to get prequalified next week and I’m wondering what kind of credit score I’ll need to get the bank’s best auto financing deal.  How are we supposed to know the difference between a bad, average, good and great credit score?”

This is, of course, an excellent question that we should all consider before we go hunting for credit. Unfortunately, it’s a reasonable question with a complicated answer. The short and sweet response is this…a good/great credit score is whatever score is high enough to get you approved for the lender’s best deal. That still doesn’t go far enough though as it doesn’t peg a specific number, and I know people want specific numbers.

For auto lending the average interest rate, nationally, for an auto loan of $30,000 is about 3.2%. But, in order to get that kind of rate you have to have a credit score of at least 720. And, some auto lending captives (the lending arm of the manufacturer) are offering deals as low as 0% on some models but, again, you need solid credit scores. So, in this scenario a score of 720 is great because you’re likely to get the best deal out there.

For mortgage lending the average interest rate, nationally, for a loan of $250,000 is about 3.7%. But, in order to get that kind of rate you have to have a middle numeric FICO score of at least 760. In mortgage lending the broker or lender pulls all three of your credit reports and three of your FICO credit scores and uses the middle numeric score off which to base their decision.

With mortgage lending the rate is set based on much more than your credit score. The home will have to appraise at a value with which the lender is comfortable. And, your income will have to be sufficient to easy handle the monthly payment. So, in the mortgage lending scenario a great score is a 760, but that’s not a guarantee for an approval at any rate, let alone their best rate.

If you just want to get approved and don’t care as much about the interest rate then there are certainly options for you as well, albeit much more expensive.  For auto lending you can have a score as low as 500 and still find financing.  The national average for an auto loan rate with a score of 500 is over 17%, which is just horrible…but so is your credit score.

For mortgage lending you’ll likely still be able to get a loan with a score as low as 620 and the interest rate will still be respectable. The average rate for a $250,000 loan with a 620 score is a little over 5.2%, which is still better than the best rate available back in 2006.

If I were you I’d shop around with a few different banks and credit unions to see what kind of auto loan terms you’ll be offered. If you’ve got scores around 720, and optimally much higher, you’ll score a great deal. But, I’d still hold out for captive financing because nothing can beat their deals, even if you pay cash. 0% from a captive lender is better than paying cash because your cash will still be earning interest.