FAQ Friday: Will FICO's New Credit Scoring System Affect Car Loans?

If your credit score has gone up or down 20 - 30 points lately, it might have nothing to do with your recent borrowing habits. FICO (formerly Fair Isaac Corporation) has radically changed its methodology to the new "FICO '08." As a result, the three-digit FICO scores you get through credit reporting bureaus Experian, Equifax and TransUnion may have changed dramatically in recent months.

FICO's rationale and how it applies to specific types of borrowers is detailed in our new article. FICO says that half of the U.S. population will see their score fall under the new system, while the other half's score will stay the same or go up. That's going to affect thousands, possibly hundreds of thousands, of the nation's car loans.

If your score is near the borderline between two tiers, a rise or fall of 20 -30 points can change your credit tier. The tier determines your APR (and thus the total amount of interest dollars) you'll pay on a car loan. Look at the huge difference it can make if your credit score drops from one tier to the next:   

FICO score    APR    Monthly payment  5-year difference from next highest tier
720-850;       6.146%         $388                                    
690-719        7.726%         $403                      $900 
660-689        9.704%         $422                    $1,140  
620-659       13.397%        $459                    $2,220 

National average APR for 60-month new car loan between $10,000 and $20,000. Rates change constantly. Source: Informa Research Services, 11/03/09.

This is why it's important to know -- and to boost -- your current credit score before you start negotiating for a car loan, whether you're buying a new car or refinancing your existing one. There are plenty of ways to improve your credit score; check out our Finance advice section for tips.

Posted by

Joanne Helperin November 6, 2009, 11:00 AM

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Car Advice Articles, Car Loans and Financing, Car Negotiating, FAQ Friday