Credit Scores and Car Buying: What Actually Matters
Credit Scores and Car Buying: What Actually Matters
Your credit score is a three-digit number that determines whether you get approved for a car loan and at what rate. That's it. Everything else is noise.
This guide explains exactly how credit scoring works in the auto financing world, what lenders actually see when they pull your report, and what you can do about it.
How Credit Scores Are Calculated
In Canada, two bureaus calculate credit scores: Equifax and TransUnion. Both use similar models but can produce different scores because they may have different information on file. Your scores can differ by 20-50 points between bureaus even with identical credit behaviour because creditors don't always report to both.
Your score is calculated from five factors, as outlined by Equifax Canada:
| Factor | Weight | What It Means |
|---|---|---|
| Payment history | 35% | Have you paid on time? |
| Credit utilization | 30% | How much of your available credit are you using? |
| Credit history length | 15% | How long have your accounts been open? |
| Credit mix | 10% | Do you have different types of credit? |
| New credit inquiries | 10% | Have you applied for credit recently? |
Payment history is the biggest factor. A single 30-day late payment can drop your score by 90-110 points if you have good credit (725+), or as much as 150+ points from an excellent score. The higher your starting score, the harder you fall. Late payments stay on your report for 6 years according to Canada.ca.
Credit utilization is what most people get wrong. If you have a $10,000 credit limit and carry a $7,000 balance, that's 70% utilization—even if you pay the full balance every month. Lenders see this as high risk. The Financial Consumer Agency of Canada recommends keeping utilization below 35%.
What Your Score Actually Means
Credit scores in Canada range from 300 to 900 according to both Equifax and TransUnion. Here's what each range means for auto financing:
| Score Range | Category | What Happens |
|---|---|---|
| 760-900 | Excellent | Best rates available. 0% financing offers. Instant approval. |
| 725-759 | Very Good | Qualify for most promotional rates. Minor rate bumps possible. |
| 660-724 | Good | Approved at standard rates. May not qualify for 0% offers. |
| 600-659 | Fair | Higher rates (8-12%). May require larger down payment. |
| 560-599 | Poor | Subprime rates (12-20%). Limited lender options. |
| 300-559 | Very Poor | Deep subprime (20-29%). May require co-signer or be declined. |
According to Statistics Canada, the average car loan interest rate in Canada was 6.86% as of March 2025—up from 3.91% in March 2017.
The 720-725 threshold matters. Most manufacturer promotional rates (including 0% financing) require 720+. Below this, you're looking at standard bank rates or subprime lenders.
What Lenders Actually See
When a dealer runs your credit, they don't just see a number. They see your full credit report, which includes:
- All open accounts: Credit cards, lines of credit, mortgages, previous auto loans
- Payment history: Every late payment for the past 6-7 years
- Balances and limits: Current debt load across all accounts
- Inquiries: Every time someone has checked your credit in the past 3 years
- Public records: Bankruptcies, consumer proposals, judgments, collections
The score is a summary, but lenders read the details. A 680 score with a recent bankruptcy is treated very differently than a 680 with one old late payment.
The Auto-Enhanced Score
Many auto lenders use an "auto-enhanced" score that weighs previous auto loan history more heavily. If you've successfully paid off car loans before, this can help. If you've had a vehicle repossession, it hurts more than other negative marks.
Prime vs Subprime: The Real Divide
The auto lending industry segments borrowers into tiers. According to industry data, close to one-third of Canadians looking to finance a vehicle aren't eligible for prime interest financing.
Prime (720+): Bank rates, manufacturer financing, credit unions. These lenders compete for your business and offer the best terms. Rates typically 5-7%.
Near-prime (660-719): Banks may approve but at higher rates (7-10%). Some manufacturer captive lenders (like Ford Credit or GM Financial) work with this range.
Subprime (560-659): Specialized subprime lenders. Interest rates of 10-20%. Expect shorter loan terms to reduce lender risk. Major subprime lenders in Canada include Rifco, iA Auto Finance, and Carfinco (GoEasy Ltd.).
Deep subprime (below 560): High-risk lenders only. Rates of 20-29.99%. Often requires substantial down payment (20-30%). May need a co-signer with good credit.
Important: As of January 1, 2025, Canada's criminal interest rate is 35% APR—any rate above this is illegal.
Why this matters: A $40,000 vehicle at 0% for 60 months costs $40,000. The same vehicle at 20% for 60 months costs $55,200. That's $15,200 in interest—nearly 40% of the vehicle's value.
The Hard Truth About "Everyone Gets Approved"
Dealers advertising "bad credit? No problem!" or "everyone gets approved!" are using subprime lenders. These lenders profit specifically from high-risk borrowers by charging extremely high rates.
This isn't necessarily predatory—these lenders take real risk on people who've defaulted before—but understand what you're signing up for:
- Interest rates of 15-29%
- Mandatory GAP insurance (often built into rate)
- GPS tracking devices on the vehicle
- Shorter loan terms with higher payments
- Aggressive repossession policies
If your credit is poor, sometimes the better move is to wait 6-12 months, rebuild your score, and then buy with better financing options.
How Credit Inquiries Actually Work
There's persistent misinformation about credit inquiries. Here's the truth:
Hard inquiries happen when you apply for credit. Each one can temporarily lower your score by 5-10 points. However, the credit bureaus recognize that people comparison shop for auto loans.
Rate shopping window: According to TransUnion, multiple auto loan inquiries within a 14-45 day window (depending on the scoring model) count as a single inquiry. VantageScore uses a 14-day window; FICO uses 45 days.
Soft inquiries happen when you check your own credit, when companies check for pre-approval offers, or during employment screening. These don't affect your score.
What this means practically: Don't let fear of credit checks prevent you from shopping around. Get quotes from your bank, a credit union, and the dealer's finance department within a two-week window. It counts as one inquiry. Do all your rate shopping within 14 days to be safe regardless of which scoring model lenders use.
Improving Your Credit Before Buying
If you have time before you need a vehicle, here's what actually moves the needle:
Quick Wins (1-3 months)
-
Pay down credit card balances to under 30% of limits. This is the fastest way to improve your score. Paying down a maxed-out card can add 30-50 points within a month.
-
Get added as an authorized user on a family member's old, well-managed credit card. Their history becomes part of your file.
-
Dispute errors on your credit report. Get free reports from Equifax and TransUnion. Incorrect late payments or accounts that aren't yours can be removed.
Medium-Term (3-12 months)
-
Never miss a payment. Set up automatic minimum payments on everything. Payment history is 35% of your score.
-
Don't close old accounts. Length of credit history matters. That old credit card with no annual fee? Keep it open, use it occasionally, pay it off.
-
Get a secured credit card if you have thin credit. Use it for small purchases, pay it off monthly. After 6-12 months, your score should improve.
What Doesn't Help
- Credit repair companies (most are scams)
- Paying for credit monitoring (free options exist)
- Closing accounts you don't use (hurts your score)
- Applying for multiple new credit cards (hurts your score)
What Happens When You Apply
Here's the actual process when you finance through a dealer:
- Application: You provide income, employment, and residence information
- Credit pull: Dealer pulls your credit from one or both bureaus
- Desktop underwriting: Software instantly evaluates your application against lender criteria
- Rate assignment: Based on score, income, down payment, and vehicle, you're assigned a rate tier
- Approval/counter/decline: You're approved as-is, approved with conditions (higher rate, larger down payment, co-signer), or declined
If declined or countered at an unacceptable rate, the dealer typically "shops" your application to multiple lenders in their network. This is normal and helps find the best available option.
The Down Payment Question
Down payment affects approval odds and rates:
| Down Payment | Effect |
|---|---|
| 0% | Requires excellent credit (750+) or results in higher rate |
| 10% | Standard for good credit |
| 20% | Improves approval odds and rates for all credit tiers |
| 30%+ | Often required for subprime, significantly improves terms |
Lenders calculate loan-to-value (LTV). A brand-new car immediately depreciates, so a 0% down loan is immediately "underwater." More down payment reduces lender risk.
For used vehicles, this matters even more. A 5-year-old car at 0% down is a high LTV loan that many prime lenders won't touch.
Co-Signers: What You Need to Know
A co-signer with good credit can help you get approved or get a better rate. However:
- The co-signer is equally responsible for the loan
- The loan appears on both credit reports
- If you miss payments, the co-signer's credit is damaged
- The co-signer can't be removed until the loan is paid off or refinanced
This is a significant ask. The co-signer is essentially guaranteeing they'll pay if you don't. Many relationships have been damaged by co-signed loans gone wrong.
Dealer Markup: The Hidden Rate Increase
Dealers often earn commission by marking up interest rates through a system called dealer reserve. A lender provides a "buy rate" to the dealer, who can mark it up by 1-3 percentage points. The difference is the dealer's profit.
Example: A lender approves you at 6%, but the dealer quotes 8%. On a $30,000 five-year loan, that 2% markup costs you an extra $1,600 in interest over the life of the loan.
This is legal—dealers aren't required to disclose whether your rate has been marked up. To protect yourself:
- Get pre-approved from your bank or credit union before visiting dealers
- Ask what rate the lender approved vs what the dealer is offering
- Negotiate the rate, not just the vehicle price
If you have a pre-approval at 5.99%, the dealer might suddenly find a way to match or beat it.
Refinancing: The Second Chance
If you financed at a high rate because of credit issues, refinancing later is an option. Many people:
- Buy a car with 15% subprime financing
- Make on-time payments for 12-18 months
- Their score improves
- Refinance with a bank or credit union at 6-8%
This isn't ideal—you've paid high interest for that period—but it's better than staying trapped at predatory rates.
Most lenders require 12 months of on-time payments before considering refinancing. The vehicle also needs to have equity (you owe less than it's worth).
The Bottom Line
Credit scores exist to predict whether you'll repay debt. Lenders use them because they work—statistically, people with higher scores default less often.
The system isn't perfect and can feel unfair, especially for those recovering from financial hardship. But it's predictable and improvable.
If your credit is good (720+): Shop around for the best rate, don't accept dealer markups, and take advantage of promotional financing.
If your credit is fair (620-719): Get pre-approved before shopping, expect moderate rates, and consider a larger down payment.
If your credit is poor (below 620): Consider waiting to rebuild, get a co-signer if possible, and be extremely wary of "everyone approved" dealers charging 20%+ interest.
Whatever your situation, understand that your credit score isn't permanent. It's a snapshot of your financial behavior that changes constantly. Make the payments, keep the balances low, and it will improve.