If you can afford to buy a car outright—without getting a loan—you don’t need to worry about your credit score. But if you need financing for your purchase, as so many people do, your score can have a big financial impact.

There’s a difference between the credit score you need and the one that will net you the best deal. It is always in a dealership’s advantage to sell you a car, so the salespeople are going to do everything in their power to secure financing for you, albeit sometimes at ridiculous interest rates.

What score do you need to get a good deal on a loan?

Typically, a credit score of 700 or higher will put you in a good position to find favorable loan terms. If your credit score is lower, you will probably be offered a higher interest rate. And the lower it is, the more you’re likely to pay. Here is an example:

Jason and Brad are both shopping for used cars. They have $4,000 to put on a down payment and want a three year loan. They both settle on the same $20,000 car, and the dealership happens to have two of them. Jason’s credit score is 750 and he is offered an auto loan at 4.5% interest rate. Brad, who has a 600 credit score, is offered an auto loan at 8.5%, which translates to a much higher monthly payment. The monthly payment for Jason will be $476, versus Brad’s $505. Over the three years, Brad will end up paying $1,049 more than Jason will for the same vehicle!

Loan Rates by Score

People with a credit score of 661-780 averaged a rate of 5.17% for a new car loan and 6.54% for a used car loan in the second quarter of 2019, according to data from the credit bureau Experian. Those with a score higher than 780 had rates of 4.23% and 4.77% (new vs. used,) and people with a score of 601-660 secured 8.12% and 11.38%. Borrowers with 500 or lower saw an average rate as steep as 20%.

Overall, car buyers had an average credit score of 717 on loans and leases for new cars and 656 on loans for used vehicles, according to Experian.

How a Credit Score is Calculated

Perhaps you’re wondering how you get assigned this important three-digit number. In the U.S., Experian and the two other credit reporting bureaus–Equifax and TransUnion–keep track of your borrowing in regularly updated credit reports. Your credit score is essentially a snapshot of these reports, a way for lenders to quickly and consistently consider how well you’ve handled your loans in the past. To find out your score, which is free, go to Credit Karma or Credit Sesame.

How to Improve Your Credit Score

There are a number of different factors that go into credit score calculations. With patience and discipline, you’re likely to improve your score if you follow some simple guidelines:

  1. Pay at least the minimum payment on all of your credit cards and loans, and don’t be late. One of the biggest factors in your credit score is your history of paying on time. While you should ideally pay your entire bill every single month, this isn’t always realistic.
  2. Don’t max out your credit cards as it is a sign to lenders that you’re strapped for cash. Try to keep your outstanding balances on loans to below 30% of your overall credit limit by paying down your debts.
  3. Don’t close old credit cards. even if you don’t use them. Longer average length of credit is an important factor. Closing old accounts can hurt your score by both shortening your average account age and reducing your overall credit limit.

IMPORTANT NOTE: Shop around for the best deal when you’re ready to buy a car. Don’t take the first offer you receive. There are free online tools, like Standard Auto Financing, that will connect you with lenders who will compete for your business.