One of the most popular questions when it comes to car finance and Credit scores is what score you need in order to qualify. Unfortunately, there’s no simple answer as everyone’s credit score is different, and every lender’s view on that score is different too.
To understand the relationship between them, let’s start at the beginning:
What Is Your Credit Score?
Your credit score is a three digit number that represents how good (or bad) your credit report is. Your credit report is a history of all your previous borrowing, as well as evidence of your identity and your financial stability. The better your history of repaying the money you’ve borrowed – such as credit cards, loans, and mortgages, the better your score.
Your utility bills can have an impact too. While they don’t help raise your score (as they’re not a form of borrowing), missing payments or failing to pay entirely can bring your score down.
There are three main credit reference agencies (CRA) in the UK – Experian, Equifax, and TransUnion. Lenders and utility providers send your payment history to one or more of them. It’s perfectly possible that one lender (for example your credit card issuer) reports to Experian and Equifax, but not TransUnion, while another (say, your mortgage provider), reports to TransUnion and Experian, but not Equifax.
That’s why it’s important to check your credit score across all three of the main CRAs, as when you apply for car finance, you never know which CRA the company will look at for your information.
It’s worth noting, though, that your application for car finance doesn’t only depend on your credit score. Like any other lender it will also take into consideration your income and expenditure, existing debts, and how big your deposit is.
What affects your credit score?
Your payment history is one of the biggest factors. A long, solid history of making debt repayments on time will give you a good score, while any missed or late payments, or indeed defaults or bankruptcies, will bring it down.
Your credit utilisation – usually specific to credit cards – also accounts for a large proportion of your score. Also known as your credit utilisation ratio, this indicates how much of your available credit you’ve used. For example, if your credit limit is £1,200 and your outstanding balance is £600, your credit utilisation is 50% – you’ve spent half your available credit. The lower your utilisation, the better your score will be.
Other factors include recent applications, whether or not you’re on the electoral roll, the average age of your credit accounts, and the overall accuracy of the information on your report such as your current address.
Of these, recent applications is arguably the most important. Whenever you formally apply for credit, it leaves a marker on your credit report, known as a “footprint” for other lenders to see. It tells them “this person has just applied for credit somewhere.” It doesn’t matter if your application was accepted or rejected, the footprint is there, and these footprints bring your credit score down. It’s only by a few points and your score usually rebounds quickly once you start making your repayments.
The problem is, if you apply for something and get rejected – whether it be car finance, a mortgage, or any other form of credit – the footprint remains. Too many applications in quick succession can bring your score down considerably because in the eyes of lenders you look as though you’re desperate for credit. That’s not a good look.
It’s a popular myth that you can have a good credit score without borrowing money. Unfortunately, that’s not the case. If you’ve never borrowed money and repaid it, there’s no way for a lender to tell if you’re a responsible borrower. That doesn’t mean you have a bad credit score, it just means you don’t have a good one either. It’s middling, or, as most of the CRAs put it – “fair”.
A “fair” credit score is exactly that – it’s neither good nor bad. It doesn’t make you less likely to qualify for credit, but it does mean you’re not as likely to get the best deal with the lowest rates, and this can be a problem for people with a “thin” credit file.
How Your Credit Score Affects Car Finance
Even if your credit score isn’t brilliant, you may still qualify for car finance. Just like with mortgages, some lenders specialise in car loans for those who have a poor credit score or a thin credit file. These deals aren’t always the cheapest, because as the lenders see it they’re taking more of a risk than they would be with someone who has a strong credit history.
Each finance company is different, so if your credit score is less than perfect, it can really pay to shop around or look for specialist car financiers. Using an eligibility checker, too, will be helpful. There’s no point in applying for a car loan that you’re not likely to get. As we’ve already mentioned, too many applications in quick succession will just bring your credit score down further and make the process even harder.
How Women Can Boost Their Credit Score And Improve Their Financial Wellbeing
How To Improve Your Credit Score
You can find the full run down on how credit scores work, as well as lots of tips and tricks for improving your credit score in our free ebook, but here are a few quick tips to bear in mind if you want to build your score.
Register on the electoral roll: While it may seem irrelevant, being registered to vote at your address helps verify your identity and prevent fraud. It’s also a strong sign to lenders that you’re in a stable position, and so increases your score
Regular payments: Set up direct debits or standing orders to make sure you never miss a payment, which is the worst thing you can do for your credit score. It’s also worth setting reminders in your phone or on a calender so you can make sure you have the funds available in your account on the day the payment is due to go out.
Consider a rent reporting service: Mortgage payments contribute to your credit score as they are a type of debt repayment. Even though rent is still a hugely important (and costly) monthly bill, it doesn’t do the same. By signing up to a service like Credit Ladder, lenders will be able to see that you pay your rent on time, and it may boost your score with them.
Reduce your debt: One thing car finance companies look at is outstanding debt, as well as your credit utilisation. If you’re using more than about 30% of your available credit card limit, bring it down as low as possible – it makes you look less dependent on your credit card to make ends meet. Similarly, if you have other outstanding debts eating up a significant proportion of your income (known as the debt-to-income ratio (DTI)), lenders may think you’re already carrying enough debt and be unwilling to loan you more. Your DTI doesn’t necessarily affect your credit score, but it can affect your overall application
Check For Errors: The internet is littered with stories of people who have gone to apply for credit – even simple things like a broadband connection – who have found they’re unable to get what they want because of an error on their credit report. Check your report regularly to make sure nothing is amiss, and that all payments are reported correctly. Sometimes a payment you’ve made might be flagged as missed, your address may be wrong, or you may spot that there are credit applications that you’ve not made – a sure sign of fraud. It’s all worth checking.
About moneypeople.com
The world of personal finance can be a maze, and navigating it without the right information can be a nightmare.
With personal loans, mortgages, and credit cards, the tiniest detail can mean the difference between acceptance and rejection.
At moneypeople.com we know that this attention to detail is vital - taking the time and making every effort to report on what is going on in the personal finance sector and examining all aspects of credit scoring to help you plan for your financial future.
We currently cover exclusive tips and information on mortgages, loans, credit cards and credit scores, and believe that everyone should have the best financial reporting at their fingertips. We are fiercely independent in our journalism.
Thank you for visiting moneypeople.com - we look forward to seeing you again.
The post A Brief Guide To Car Finance And Credit Scores appeared first on moneypeople.com.
