Credit score for car finance

Your credit score will be a factor in buying a car – unless you decide to buy it outright. If you’re going to take out any finance to get yourself in a car, you’ll need to consider your credit score.

Before applying for any finance (whether it’s a car or not), it’s essential to check your credit score. Every time you apply for finance, it will show up on your report. Do this too often and get rejected, which can negatively affect your financial standing!| Make sure you do your homework before proceeding with a finance application.

Unfortunately, success in pursuing car finance isn’t always as simple as having a good credit score. Each Lender tends to have its own scoring system and criteria for who they want to loan. This commonly 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.

Your credit score is crucial. Have a poor one, and you likely won’t get very far into the finance application. Lenders tend to have an automatic filter that will auto-reject anyone below a specific credit score.

This article will explain your credit score, why it’s so important, and tips to get it as high as possible to finance a suitable car!

A credit score derives from your credit report. This report contains lots of personal and financial history about you. Ever had a phone contract? It’ll be on your credit report. Address history? Credit report!

A credit reference agency (CRA) calculates your credit score.

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

In general, though, they are vastly similar. If you have a strong credit rating with one, you’ll likely have the same with another. Of course, this applies inversely, too – if you have a poor credit score with Experian, you won’t have a great one with Equifax. It’s up to the Lender to decide what CRA they use.

Even though it can cause a lot of frustration, a credit score is quite helpful. It’s a simple way for lenders to determine how likely you are to repay a loan. Imagine you didn’t have one – you might have to hand over bank statements, proof of income, and so on. A credit score saves hassle and means you can apply for credit at the drop of a hat.

Imagine how simple it would be if you just knew you needed that magic score of, say, 500 to get the car finance deal you want. Unfortunately, that’s not the case.

As we mentioned earlier, each CFA will use different scoring systems. For instance, the TransUnion score ranges between 0-710, with a UK average of 610. However, the Experian scoring system allows for a score between 0-999, with the UK average being 759.

Taking those numbers at face value, you’d be ‘Good’ on TransUnion but ‘Poor’ on Experian. Confusing, right?!

Thankfully, they’re just graded differently! A good credit rating is a good credit rating, so don’t panic if your number is different on each report. Still, it’s worth checking your credit score on the three CFAs to know where you stand.

As mentioned, there are three leading credit score agencies in the UK. They are:

• Experian
• TransUnion
• Equifax.

With all three, the credit scores are measured in three-digit numbers. The higher the number, the better and the more reliable the credit reference agency will view you (meaning you’re more likely to get the finance deal you want).

Here’s a rundown of the scoring bands:

Experian is the largest CRA in the UK

Experian credit score band is between 0 – 999. The average UK score among its customers is 759*, rated as a Fair credit score.

Here’s how TransUnion rates credit scores bands

TransUnion rates your credit score out of 710*, and the average score amongst their customers is 610.

Here’s how Equifax rates credit scores

Equifax ranges from 0 to 1,000, and according to Ocean Finance, the average for the Equifax new scoring system fits in the Fair* band range (between 439 and 530).

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

Your credit report 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!).
• Any 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 financial links you have with other individuals. For example, if you take out a joint loan with your partner to buy a car, this information will be on your credit report (and theirs).

Public record information

This is 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 at least 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 your religion, political party preference, and so on. Just the basics!

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 credit reference agencies. Each lender has the right to impose its own interpretations. This typically includes information such as your salary, length of time in employment, and your affordability (how much your living expenses are).

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 credit.

How does the credit reference agency calculate your score?

Firstly, it’s worth understanding how the CRAs calculate your score in the first place. They will 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 credit reference agencies come to that magic number are unknown: the CRAs don’t tend to share their algorithms for working this out.

But basically, they are looking for red flags! If you regularly miss repayments 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 credit report.

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).

The score will also consider any financial relationships you have with other people. This is why it’s essential not to take out joint loans and 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 finance deal with a partner or parent with a strong credit score can positively affect yours.

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 score, 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 your score.

How does the lender interpret your credit score?

While the Credit Reference Agencies have different scoring systems, they typically have more or less the same criteria for what’s ‘good’.
The waters are a little bit muddy when it comes to the lender. Lenders will typically use your credit score from a CRA as a bit of a shortcut. They’ll reject your finance application at the first hurdle if you have a really low score.

If it’s decent, they typically have further criteria to decide if they want to loan you money. This is usually in the form of asking about your income, outgoings, and overall affordability.

You’ll likely succeed if you meet their affordability standards and have a decent credit score.

Depending on the Lender, they might ask if you have a criminal record, parking or driving fines, student loans, or council tax arrears.

After getting that information from you, they’ll combine it with the CRA score to calculate their own 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.

It’s important to note that each lender will likely have different criteria for how they make 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 if that’s you, you’re bound to find something.

What does affordability mean when applying for car finance?

You might have heard us say ‘affordability’ a few times now…so what does that mean? Affordability is pretty simple – it’s a way for the lender to see if you can afford to pay back the loan on your budget.

To find this out, the lender will likely ask you a few questions, including:

• Your monthly salary.
• Your job title and company.
• Any other household income (like your partner’s salary).
• Your rent/mortgage payments.
• Other household payments (groceries, phone bills, and so on).
• Whether you’re likely to experience a decrease in income any time soon.

You’ll likely succeed if you meet their affordability standards and have a decent credit score.

Let’s consider an example of good credit, but low affordability

Imagine you decide you’d like to apply for finance on a Ferrari Roma EMI. You’ve got an excellent credit rating, so you kick back and hit that ‘apply’ button without a care in the world.

And while you have a good credit rating…you probably can’t afford it. This would work out at a monthly PCP payment of over £8000.

So, you have no chance if you earn £2,000 per month.

Here’s an example of average credit, but high affordability

Your credit rating is pretty average. You’ve only recently taken out a credit card, so you don’t have a lot of history.

You earn £1,600 monthly and are looking to buy a new Ford Ka on a PCP deal. You’ve been saving diligently, and working extra shifts at your part-time job, so you have a reasonably sizable deposit to put down. Your monthly repayments work out at around £100 per month.

This is a small percentage of your income – less than 10%.

This means that the lender is likely to consider the risk of lending to you fairly low. You’re likely to get the finance, even if your credit score could use a little work.

Conclusion

An excellent credit rating is not a golden ticket to a car finance deal. Someone with a less than average credit rating might readily get accepted over someone with a good credit rating because they have better affordability. Remember, this is in place for a reason. Only take out a car finance deal on a car you can afford!

As it contains all of your information, you have a right to check in on your credit score whenever you want to. We’d recommend doing this once a month after you get paid, so you can keep on top of your finances and spot any missed payments or things you’ve forgotten.

To see your credit report, head to any major 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 how to improve 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; 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