How to get the Highest Fico Score for your Auto Loan

**kork13** · 10-04-2009, 09:05 PM

I know this probably sounds crazy, but ... do you really need a $40k car? That would be my first suggestion... either find a less pricey new car, or a used one. Wouldn't it be better to pay less for a car (which instantly depreciates the moment you drive it off the lot -- and luxury cars drop in value the fastest) and have the remainder available for a decent down-payment on your home? I'd recommed get a less expensive car (maybe around $20k or less?) and use the rest of your planned $40k as a home downpayment.

Beyond that, to actually answer your question directly... How long will it be until you buy a house? Are you able to secure an auto loan below ~3-4% APY?

If the answers to those are ">1 year" and "yes", then you can safely do a 50% downpayment on the car, get the lowest rate loan you can, and pay it off in about 1.5-2 years (making double payments should do it). This allows you to build additional history of timely payments on a secured, term loan, which helps your credit score. As long as you can get a low rate, it won't cost you an exorbitant amount in interest.

If those answers are "<1 year" and/or "no", then buy the car outright with cash. When you get a new loan, the credit inquiries temporarily decreases your credit score. I normally say to give ~1 year for this to recover. Plus, doing it this way means ZERO interest charges. Many will also say that you should never have to "buy" your credit rating by paying interest needlessly if you can simply pay in cash upfront.

**sofocused978** · 10-04-2009, 09:18 PM

What kind of car are you planning on buying? I agree with the poster above and think you should expand your options to a nice used car possibly. I know you can get some seriously nice cars, preowned with low miles and warranty for around $20k.

**JourneyCC** · 10-05-2009, 04:47 AM

Ditto! Please consider a 1-3yr old car that has already lost it's "driven off the lot" depreciation. Please! Besides you are going to need that for a down payment on your new house likely to avoid PMI. And you don't want to affect your debt/loan ratio too much.

But to answer your question. Lending institutions like to see that you can act (pay) responsibley over time. I would do a 3yr term loan, with 50% down and then pay on it monthly until you are about 90 days out from buying your home. Then I would pay it off before qualifying for a loan on the house. The house lender is going to want to know you have the least amount of liabilities as possible, but also see that you made your payments on time for at least a year or more. This is what builds FICO score (as well as staying below 20-25% debt/loan ratio).

Just a thought, but if you spend $25K on a car, knowing you can pay it off in 1 to 3yrs, you are going to be surprised how quickly you might need the other 15K for your new house! At the very least a decent emergency fund in this economy.

**boosami** · 10-05-2009, 09:24 AM

Not enough information for a good answer here.

With only two credit cards, your credit is probably not varied enough to qualify for a good home loan. Is there more credit history here? What is the current credit score? If not, an auto loan may be a good idea to get more variety in the credit score. In this case, I probably wouldn't try to buy a home until the auto loan was paid off.

How much will the house cost? To get the best rates and a conventional mortgage on the house, you should have 20% saved up for a downpayment on the home. So, if you are buying a $100,000 home and have $40k in available savings, you should be sure to have $20k available for the 20% downpayment on the home. That means you now have $20k left over for the car or whatever, so I guess if it had to be a $40k car you'd have to finance $20k of it.

Is this really a hypothetical, or a real scenerio you have?

**disneysteve** · 10-05-2009, 01:32 PM

Originally posted by boosami View Post

Not enough information for a good answer here.

With only two credit cards, your credit is probably not varied enough to qualify for a good home loan. Is there more credit history here? What is the current credit score? If not, an auto loan may be a good idea to get more variety in the credit score. In this case, I probably wouldn't try to buy a home until the auto loan was paid off.

How much will the house cost? To get the best rates and a conventional mortgage on the house, you should have 20% saved up for a downpayment on the home. So, if you are buying a $100,000 home and have $40k in available savings, you should be sure to have $20k available for the 20% downpayment on the home. That means you now have $20k left over for the car or whatever, so I guess if it had to be a $40k car you'd have to finance $20k of it.

Is this really a hypothetical, or a real scenerio you have?

I agree with this post. We need more info. Without knowing when you plan to buy a house, how costly of a home you would be looking at and how much of a downpayment you have, we can't really answer your question.

I would want to see the car paid off before applying for the mortgage. I'd also want to see a 20% downpayment on the house. And, like the others, think 40K is a ridiculous amount to spend on a car, even more so because you want to buy a home in the near future. Drop your car budget to 20K. Pay cash. Keep the other 20K toward your downpayment on the house. If 20K isn't enough for a 20% downpayment and you don't have other savings, get a cheaper car and hold onto more of that 40K in cash.

**boosami** · 10-05-2009, 02:50 PM

On another note, FICO is not the only thing banks look at when deciding your rate... Your employment, income, and cost of the home, among many other things are often taken into consideration when the bank decides if you qualify, let alone get a good rate, on an amount for a property. People tend to fixate on the FICO and think if they have a high score they can get anything they want. In the real world, that's not the case at all--there are more factors that apply. These days, banks are not going to loan you an arbitrary amount of money sub-prime style solely on the merit of your FICO score--you'll need to prove to them that you're able to afford a reasonable amount of money, and that you have the means to pay it back.

**graceful** · 10-05-2009, 02:59 PM

I agree with others about getting a less expensive car. Even new, there are deals out there for great cars for under $30K or better yet $25K.

Pay as large a down payment as the dealership will allow on a zero balance rewards credit card. Pay it off in full when the bill comes. Finance the rest for whatever low incentive interest rate the dealerships are offering at no more than 3.9% or 4.9%. Then PAY IT OFF super quick BEFORE you apply for a mortgage, the next month if you have to. Save the $10K to $15K for the down payment on the house.

Now if you are planning to apply for a mortgage asap, scrap the auto financing and just pay cash. Better yet, wait until after the house closing to buy the car.

Good luck.

**Seeker** · 10-05-2009, 02:59 PM

Originally posted by herb0lary0 View Post

Theoretical Scenario:

You have 2 credit cards with no balance and no late payment. However, you plan to buy a house in the future. To get the lowest mortgage interest rate in your future buy, you have to get the highest FICO score possible to qualify. You are buying your first car. You have available money to pay for $40,000 car...cash if you have to... How do you configure your auto loan to get the highest FICO score later on?

Possible choices:

A. Pay the car in full ...cash now

B. Loan the Full Amount ($40,000)

C. Loan with downpayment for X# of months

If you choose C, How much do you loan? How much will be the downpayment? How many months?

(To get the highest FICO Score + Low Interest to the bank)

Hypothetically, without details, the answer will usually be C.... if the real goal is to increase your FICO, and if the hit for the credit inquiry for the auto loan is greater than a year between the next inquiry (the house loan).

But I agree with the others, the details with your financial situation, current FICO, nember of months between the two credit inquiries, can significantly make a difference. You posed this as a hypothetical situation though...

Hypothetically, doing option A will not change your FICO whatsoever.

Option B will have a negative impact, because a 40k car loan is essentially upside down as soon as you drive it off the lot.... it's money thrown away for a necessity (getting around), but anything can easily destroy it and you will still owe. It's a large debt that can potentially knock down your ability to pay for the house.

**herb0lary0** · 10-05-2009, 04:55 PM

.....

**herb0lary0** · 10-05-2009, 05:10 PM

Thank you for your responses.

Here are some Additional Info:

The vehicle is actually a crossover with cargo room and high mpg. I did the math with regards to the 5 year cost-to-own and the govt incentive for new car buyers for 2009(car's sales tax are returned at refund), it is more cost-effective. Moreover, the 5 star safety feature is very important to us because nothing compares to being alive and less-worry when travelling.

3.99% up to 48 months autoloan is the lowest I have seen among local credit union/bank. If you know a better rate pls do post...

Buying a house will be several years from now. But preparing for it...

Follow-up Question:

1. Is 50% downpayment the perfect balance of max fico score and least interest yield for banks? Or the greater downpayment, the better?

2. Would 1 year loan term be a good enough credit "history" for FICO score?

3. How does 1 year loan term compare to longer loan term (2,3,4 years) in terms of fico score?

4. If I understand it correctly, debt/loan free for at least one year from next inquiry for credit(Mortgage) is the best.
Does having longer debt/loan free period better?

Thanks you for your input.

**disneysteve** · 10-05-2009, 06:33 PM

I have a question. What is your FICO now?

The vehicle is actually a crossover with cargo room and high mpg. I did the math with regards to the 5 year cost-to-own and the govt incentive for new car buyers for 2009(car's sales tax are returned at refund), it is more cost-effective. Moreover, the 5 star safety feature is very important to us because nothing compares to being alive and less-worry when travelling.

More cost effective than what?

As for the 5-star rating, I'm sure there are lots of cars with that rating that cost a lot less than this one. You can find them all here: Safercar.gov

**myrdale** · 10-05-2009, 06:39 PM

To the original point of maxing the FICO score for a future purchase, first lets look at what FICO actually looks at.

There are 3 different companies who do FICO scores, TransUnion, Equifax, and Experian. Each of these companies will have a score, they may vary slightly, or dramatically. All 3 look at the same things though.

1) Payment History - How many payments have you missed? If you have a habit of not paying your bills on time, your score will be lower. If you miss a payment, it will affect you more heavily today, but less so after a few months have passed.

2) Amount of Debt - Do you owe $30,000 to various companies? If you have alot of outstanding debt, you probably are not a safe bet for loaning more money to.

3) Length of Credit History - I'd rather loan money to someone who has had a long history of paying back. More specifically they look at the age of your oldest account.

4) Amount of New Credit - Someone who has rushed out and opened 5 new lines of credit in the past month, probably has fallen on hard times, and would be a risk to loan to.

Other things that are figured in:

5) Types of credit: A mortgage, a car loan, a secure or unsecure credit card. Having multiple types of credit can help.

6) Credit to debt ratio: Having a $5000 limit but only a $500 balance will earn a higher score than a $4500 balance.

7) What ever else I forgot.

Last a card with no late payments, but has had no activity? I do not know how this will affect you.

Now with a very basic review of FICO done, how can we max your FICO score with a car purchase?

1) Get the loan for the longest time possible.

2) Make all payments on time.

3) Remember, after the account is payed off in full, it will drop from your credit report. Buy the house before the car is paid off.

Now with that theoritical situation answered, lets ask does this make sense? Well sadly no. Here's why.

Your buying your first house, but before you do you are going to buy a $40k car. God Bless You if you can afford it. But if you can, then the whole FICO score should not matter. Since your concerned with FICO, I dont think you can.

First, $40k is alot of money. I live in a modest house that is $110k in value. That would be a sizable downpayment for me. I am going to take a leap of faith and say your house is in the +$250k range. That is still a nice down payment.

Second, a good bank will look at more than FICO. How long have you been employeed? How much do you make? Do you seem like a reasonable person. None of these are quantified by FICO. Your loan officer will take all these things into account if she knows what she is doing.

Third, as stated, when paid off the account will drop off of your FICO score.

A better plan? Buy a car that is not so expensive. Use your current credit cards moderately and pay off in full every month. A single credit card handled correctly will do you far more good than a pocket full of visa's

How long to build FICO score? September 2006 I had no credit score, literally 0. My bank does underwriting and issued me a mortgage for $100k. At the same time, Home Depot declined to give me a credit card.

April 2007, Home Depot approved me.

May 2007, my scores: 724, 655, 697.

May 2008, my scores: 754, 702, 746.

I have not checked them since. Anything past 750 and your golden.

While I would say FICO is important, I will say it is not the MOST important thing. It will not jump up over night either. Buy a car that is within your means, and position yourself so the house will be a blessing and not a curse.

**Seeker** · 10-05-2009, 07:26 PM

Originally posted by herb0lary0 View Post

Thank you for your responses.

Follow-up Question:

1. Is 50% downpayment the perfect balance of max fico score and least interest yield for banks? Or the greater downpayment, the better?

2. Would 1 year loan term be a good enough credit "history" for FICO score?

3. How does 1 year loan term compare to longer loan term (2,3,4 years) in terms of fico score?

4. If I understand it correctly, debt/loan free for at least one year from next inquiry for credit(Mortgage) is the best.
Does having longer debt/loan free period better?

Thanks you for your input.

"myrdale" is completely correct. But I wanted to directly respond to your questions as above.

1) Fico does not care what your downpayment is. They don't care what your "loan term" is per se either. They look only at the committed monthly payment amount and the fact that he or she is making good on that committment. Paying on time or paying late according to the lenders?

They don't know your income. They don't care. All they care about is recording the history.

Lenders look at your history/FICO.... and they look at your income... they make all the decisions whether or not to loan, based on what they find. Based on their criteria. FICO is only one number they look at... nothing more, nothing less.

2) Terms of the actual loan or length of time does not matter.

3) Terms of the actual loan or length of time does not matter.

4) Just by filling out a loan form, someone will be checking into your credit history. That's a "hit" on your credit record, it lowers your FICO only because it means that something is changing. You're looking at getting something on credit, which means that new credit may compromise your ability to pay on the already owed debts. That's why FICO lowers when applications are made.

But the organization called FICO, does not do anything to make determinations or change the numbers. They are only history recorders.

**Seeker** · 10-05-2009, 07:33 PM

One more thing, without a "history" -- paying cash or paying outright on everything you buy -- means that lenders have a more difficult time in trying to decide whether or not you are a good credit "risk".

When you buy a house, the larger the down-payment, the more you show your committment. The more money you have tied up in the house, means that they risk less in terms of you defaulting or walking away from the property if things go sour.

So, if you have no "history" but a lot of cash, you still would be a better credit risk, then someone who had a lot of history (and a good FICO), but not a lot of downpayment.

In your situation, if the 40k car was not an important "need", then I too would strongly advise you to save it for your house down-payment. There are many safe cars and trucks that are safe and reliable in today's marketplace.

How to get the Highest Fico Score for your Auto Loan