What Credit Score is needed for Car Finance?

Imagine how simple it would be if you knew what credit score is needed for car finance. What is the magic number, 400, 500, or 600? The answer is none of them.

It might surprise you that there is no minimum credit score needed for car finance, and no credit score guarantees you’ll get approved for car finance.

Typically, the better a credit score, the more chance of a successful application, but lenders consider much more than what credit score is needed for car finance.

Your credit score relates to your financial history, demonstrating how you manage your finances. Lenders choose whether to accept or decline your car finance application by looking at your credit history and affordability, including income, expenses, and outstanding debt.

This article will explain your credit score and how it works to get car finance and buy a car!

A credit score derives from the credit history containing your personal and financial payment history. Ever had a phone contract? It’ll be on your credit report. Address history? Credit report!

You won’t get a car loan without the lender wanting to look at your financial history. They want to be sure you can make the monthly payments.

Your financial history is significant in helping you get car finance – unless you buy the car outright.

Ensure you do an affordability check to establish the budget you can afford to buy a car.

The sensible action is to check your credit score before applying to get car finance.

What are credit reference agencies?

It starts with a credit reference agency (CRA) calculating your credit score. UK consumers rely on their credit score for all means of borrowing money, including being approved for car loans.

The leading three CRAs are Experian, TransUnion, and Equifax. Rather unhelpfully, they all use their own unique methods to calculate a credit rating. You have three credit scores – not just one!

In general, though, they are pretty similar. If you have a strong credit rating with one, you’ll likely have the same with another and be on your way to getting car finance. Of course, this applies inversely, too – if you have a poor finance score with Experian, you won’t have a great one with Equifax.

It’s worth understanding how the CRAs calculate your score. Firstly, they analyse the report that contains all of your financial records and some of your basic personal information.

For instance, they might look at your current and previous loans, utility contracts, credit cards, phone contracts, repayment history, your last Klarna ASOS order…and so on.

The exact methods for how they come to that magic number are unknown: the CRAs don’t tend to share their algorithms for working this out.

However, they are looking for red flags! If you regularly miss monthly payments or default on a debt, it will hammer your credit score. Having multiple banks and credit card accounts can be helpful – assuming they’re not maxed out. If you have three credit cards with a total credit availability of £5000, but you only use £1000 a month and pay it off, it will look good on your financial history.

When it comes to personal history, the CRA will look at your:

• Employment status (out of work, employed or self-employed).
• Address (whether you have one, how long you’ve lived there).
• Whether you are on the electoral roll (you’re registered to vote).

Their score also considers any financial relationships you have with other people. It’s essential not to take out joint loans and car finance deals with someone with a poor credit rating, as it will look poorly on you and affect your score. The opposite applies, too, though! Taking out a joint or guarantor car finance deal with a partner or parent with a strong finance score can positively affect you.

County Court Judgements (or decrees in Scotland) are typically issued when you’ve failed to pay a fine or debt and are seriously bad for your credit rating, so avoid these at all costs.

Suppose you have been in a bad situation and have entered into an Individual Voluntary Arrangement (IVA) to pay off your debts. In that case, this will also show on your report and impact badly on your credit score.

Checking your credit score before you apply for significant finance, such as a car loan, makes plenty of sense; you’d be surprised how many people don’t.   

As mentioned, the leading CRAs in the UK are:

• Experian
• TransUnion
• Equifax

With all three, the credit scores are three-digit numbers. The higher the number, the better and the more reliable the credit reference agency will view you.

Each CRA records your score against a Band – for example, with Equafax, your Band is Fair if you score between 439 – 530.

However, with Experian, a Score between 0 and 560 returns a Banding of Very Poor.

See below for the credit scores for each CRA.

* The average score for each of the CRAs is of January 2022

Experian arranges its ranking by scoring out of 999

They rate their scores as follows:

What is the Experian average credit score?

Their average UK score is 759*

TransUnion rates your credit score out of 710

This is how they rank them:

What is the TransUnion average credit score?

Their average UK score is 610*

Equifax arranges their ranking by scoring out of 1000

This is how Equifax rates credit scores:

What is Equifax’s average credit score?

The average UK score is between 439 and 530*

How does the lender interpret your credit score?

As if it wasn’t complicated enough, getting a good car finance deal is not as simple as having an excellent credit rating with all CRAs.

While the CRAs have different scoring systems, they typically have more or less the same criteria for what’s ‘good’.

However, the waters are a little bit muddy regarding the lender. Lenders will typically use your CRA credit score as a shortcut. Have an abysmally lousy credit score, and you likely won’t get very far into the car finance application. Lenders tend to have an automatic filter that will auto-reject anyone below a specific finance score.

What happens when your credit score is within the lender’s guidelines?

Lenders typically have further criteria to decide if they want to loan you the money. Their check includes things like monthly outgoings and affordability, total income, and job security…but it’s up to each lender to decide how they want to do it.

Depending on the Lender, they might ask if you have parking or driving fines, student loans, council tax arrears or even a criminal record. As tempting as it might be, it’s essential, to be honest with the lender. If you’re not, and they find out, they could cancel your finance.

After getting that information, your lender will combine it with the CRA credit score to calculate their in-house score. You typically won’t see this yourself, and it’s usually automated. Your car finance application will be accepted if you have a high enough score.

Drivers with a less-than-perfect finance history (poor credit history) regularly get accepted for car loans – the credit score needed for car finance is often achievable. However, expect to pay a higher interest rate and possibly a request from the lender to chip in with a deposit on the car.

Car finance lenders use their own eligibility criteria when approving a loan. Some may place more significance on your credit score than others.

It’s helpful to note that each lender will likely have different criteria for making up their score and what they deem to be a good affordability rating. That’s why it’s so important to shop around! Many lenders specialise in lending to people with low credit ratings, so you’re likely to find something if that’s you.

What happens if you get declined for car finance? It depends on who rejects you.

Have your application declined at the first stage with the car finance broker, then not much? The broker only does a “Soft” search that won’t appear on your credit history.

However, getting initial approval for car finance (approved provisionally) means a finance company has declared interest in looking in detail at your application. If you proceed, the Lender triggers a “Hard” search on your finance file. Get a decline at this stage, which will impact your credit score.

What are your options if you can’t get car finance? You could enlist the help of someone such as a parent or partner and take out joint car finance or a guarantor loan.

Your finance history will contain a lot of information about you – some that you’ve probably forgotten!

It contains things like:

Bank accounts

• Current account providers as well as overdraft status.

Credit accounts

• Credit cards, the providers, and balance.
• Klarna’s buy now, pay later (BNPL).
• Store cards (it’s worth noting that these are going the way of the dinosaurs!).
• Past or outstanding loan agreements.
• Utility payments such as gas and electricity.
• Insurance such as car insurance – only when paid monthly.
• Mobile phone contracts.
• Car finance.

By containing all the details of your credit accounts, the Lender can see whether you typically make repayments on time and in full. Suppose you often forget to pay your minimum payment on a credit card, for example. In that case, this will negatively impact your credit report.

Missed or late payments and credit defaults will stay on your credit report for six years, which can be a costly mistake.

Financial links with other people

Your credit report will also show any finance links you have with other individuals. For example, suppose you take out a joint loan with your partner to buy a car. The information will be on your credit report (and theirs).

Public record information

The scary stuff! You might find some of this information on your credit report if you’ve been struggling financially. These stay on your report for six years and will severely affect your ability to get credit.

• County Court Judgments (called ‘Decrees’ in Scotland),
• Home repossessions.
• Bankruptcies.
• Debt Relief Orders and individual voluntary arrangements.

Personal details

You’ll also find some personal details on your credit report. These are essential details, such as:

• Your name and date of birth.
• Your current and previous addresses.
• Whether you’re on the electoral register.
• If you’ve committed fraud, or if someone has stolen your identity and committed fraud, this will be on your file under the Cifas section.

It’s important to note that your credit report doesn’t contain information like religion, political party preference, etc. Just the basics!

As it contains all your information, you can check your credit score whenever possible. Many people do so once a month after getting paid, so they can keep on top of finances and spot any missed payments or forgotten things.

To see your credit report, head to one of the CRA websites. It’s your information, so legally, this should be free. Just be aware that each CRA might try to offer you a paid online service to get updates and tips on improving your credit score.

Experian https://www.experian.co.uk/consumer/experian-credit-score.html

TransUnion https://www.creditkarma.co.uk/

Equifax https://www.equifax.co.uk/

This paid service isn’t necessary for most people. Still, it can be helpful if you’re looking to take out a big credit application soon – such as a fancy new car or a house. The service is similar for all three CRAs; they offer a 30-day free period before any charge. However, make sure you put a note on your calendar to cancel before the trial ends if you’re not interested in paying. However, there are worse ways to spend your money, though! principles.