The Fair Isaac Corporation tabulates credit information on consumers and businesses across the United States and uses the data to award credit scores known as FICO scores. Financial institutions use FICO scores to assess the level of risk involved in writing loans for particular individuals or entities. Lenders have minimum FICO score requirements for all credit products including car loans.
History
In 1956, Bill Fair and Earl Isaac founded FICO. Initially the company recorded data for analysis that Fair and Isaac believed companies could use when making business decisions. In 1958, FICO developed the first method of rating credit. In 1989, in conjunction with FICO, Equifax launched the first credit scoring beacon system. In 1991, TransUnion and Experian began using FICO scores. Experian and TransUnion later developed separate scoring systems that are similar to FICO scoring.
Features
FICO credit scores range from 300 to 850, with higher scores indicative of stronger credit history. Most people have scores between 600 and 750. Financial divisions of car manufacturing firms usually offer the best terms to borrowers with FICO scores above 740. People with scores above 720 qualify for car loans through most finance companies, and scores of between 660 and 680 are the minimum required for car loans at most banks. Generally, people with higher scores pay lower interest rates, although many large banks charge flat interest rates regardless of credit scores.
Effects Of Credit History
FICO scores comprise payment history, balances owed, new credit, types of debt and average length of credit accounts. Payment history has the largest impact of the FICO factors and amounts to 35 percent of the overall score. Payments 30 days or more late remain on credit reports for up to seven years. Balances owed amount to 30 percent of the FICO score, and people with high balances score poorly in this category. Large numbers of credit inquiries negatively impact the scoring in the part of FICO that scores new credit.
Misconceptions
Many people believe that their ability to qualify for a car loan depends entirely on their credit score. Lenders use other factors along with credit scores in the underwriting process. Loan applicants must provide income verification in the form of payslips or tax returns to prove that they can afford to pay back the loan. Banks look at applicants' levels of debt relative to their gross income when reviewing car loan applications. Generally, debt-to-income ratios on car loans cannot exceed 45 percent.
Warning
People with low credit scores or subprime scores can qualify for car loans, but they often pay extremely high interest rates. Some used car dealerships get financing from investment firms who cater to investors seeking high rates of return on their money. The car dealer gets immediate payment, and the investment firm receives monthly payments with interest rates close to 20 percent. These arrangements put investors at risk because subprime loans have high default rates. The loans do not benefit borrowers because they are not usually reported to credit bureaus and have prohibitively high payments.
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