No credit history? How to build one and secure car finance

No credit history? No problem. Learn how to build a financial reputation and get a car on finance

John Evans
Jul 30, 2019

‘Money makes the world go around’ goes the old song. But substitute ‘money’ for credit and it would be much more accurate.

Credit is what you have when you borrow money, be it for high-street purchases on a credit card or major purchases such as a house or a car.

The loan may be in the form of cash or something more sophisticated such as hire purchase or personal contract purchase (PCP) finance for a car but whatever form it takes, the lender will want to know you’ll pay it back – with interest.

Consequently, it’s easier for them if they have experience of dealing with you in the past or, if they don’t, that they can check up on you and find out if others have. The more positive lenders' experience of you is, the better your chances of not only getting credit but also getting low interest charges.

This record of your financial dealings is what’s called your credit history and lenders calculate your credit rating based upon this. The higher the number, the better your credit rating and the greater your chances of getting credit at a favourable interest rate.

But what if you don't have any credit history? Will anyone lend you money and if not, how do you encourage them to? With the help of Lisa Hardstaff, credit information expert at Equifax, one of the credit reference agencies, we answer some common questions:

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How do I find out my credit history?

Ask a credit reference agency. There are three of them, called Experian (it’s the largest), Equifax and TransUnion. They hold your credit report which includes details of your address, past and present credit agreements, public records including county court judgements (CCJs) against you and financial associates (people you’ve jointly taken out credit with).

From this information the agencies award you a credit score. You have a legal right to see your credit history and for free, too. However, for a payment you can have regular updates on your credit history sent to you, as well as sight of your credit score calculated by the agency. Find out how to gauge whether your credit score is good enough to finance a car.

Lenders refer to one or all of these agencies and their reports in order to run a credit check on you and calculate their own credit score when you apply for a loan.

Why don't I have a credit history?

If you've never borrowed money before, it's possible that you don't have a credit history. As a result, it’s likely that many young people who have never had any financial responsibilities including, for example, a mobile phone contract in their name, will not have a credit history - or at least not enough credit history to prove to the lender that they can borrow money and repay it.

You may also not have opened a bank account, as that shows you can manage money responsibly, too. Additionally, you might not be on the electoral roll - you're not registered to vote, in other words - so your address is unknown.

You may think that no history is better than a bad history, but in some ways it’s even worse because you are an unknown quantity and lenders may feel it’s better to be safe than sorry, so they could decide not to lend you money.

Less problematic than either of these but still not great as far as a lender is concerned, is someone with a so-called ‘thin history’. This could be an older person with a mortgage but who, otherwise, borrows very little. As a result, the bank has less information about them on which to base its lending judgement, so it might charge a higher interest rate to be on the safe side.

How do I get a credit history?

You may have to put that new car on hold for around six months, since building up a credit history requires a little time and patience.

First, make sure you’re on the electoral roll since it lets lenders know you have a settled address. It helps if you’ve been resident there for longer than a year, too.

Open a bank account and manage it responsibly by paying bills on time, and setting up direct debits for energy bills and insurance bills. Consider taking out small amounts of credit to demonstrate your ability to responsibly manage credit and repay debts. Ensure the full balance is paid off each month to avoid being charged interest.

Try not to use your overdraft if you can avoid it, but if you do have to, make sure you settle the balance it before any charges kick in.

Avoid exposing yourself to someone else’s poor credit record by closing any joint accounts with a former partner, for example, and avoiding starting new arrangements with someone else. Their poor credit record will affect yours. 

What other ways can I build up a credit history?

Where several finance offers are available on the same car, you may have to put down a minimum deposit to secure the interest-free credit option or stick to a shorter contract. You may also need to focus on hire purchase rather than PCP finance This could be a way to get approved for affordable finance on the car you want and improve your credit score.

Part of the reason for this is that hire purchase is set up so you pay higher monthly payments than with PCP but automatically own the car at the end of the contract. As a result, you may have to pay a little more per month, but you're less of a risk to lenders, as you're paying off the debt more quickly than you would be with PCP. Consequently, being open to hire purchase rather than just PCP could make the difference between being approved and not. Make the payments for this on time and you'll build up your credit history.

What can slow down the rate that my credit score improves?

Poor management of your financial affairs, obviously, but also the existence of old bank or credit cards and bank accounts you’re no longer using. Close them because lenders take them into account when calculating the total amount of unutilised credit available to you.

Also, take advantage of your right to see your credit history to check it contains no errors or misunderstandings. If you spot any, notify the credit reference agency immediately. They will mark it as being disputed and have 28 days to remove it or explain why they believe it should stay. Also speak to the lender who gave the information to see if you can resolve it that way.

If necessary, you can add a ‘notice of correction’ to a piece of information on your history file that might, for example, update a lender on your present circumstances and paint a more positive picture.

After six months with a clean credit history, can I start borrowing?

Equifax calls this moment being ‘credit ready’. You’ve got your credit history on track, showing you can handle credit and manage your financial affairs. But don't blow it by applying for a loan you can't afford to repay or even by making multiple approaches to lenders.

On this last point, lenders make a distinction between what they call ‘hard’ and ‘soft’ credit searches. The latter occurs when you request a quotation from a lender in order to find out what credit, and at what interest rate, might be available to you before making a full application. Typically this happens when you visit a comparison website for a better deal on a mortgage, a credit card or a personal loan.

Only you and the website that helped you know about this soft credit search and it doesn't appear on your credit history.

However, a hard search, when you make a formal application with a lender for a loan, does. You may simply be trying to find out if you would be accepted before, if necessary, moving onto a new lender. However, these applications go into your credit history where they are seen by other lenders who then think you are making multiple applications for credit - implying that you could be desperate for money and in a poor financial state - or even that a fraudster has your personal details.

Carrying out multiple hard searches is the one time when shopping around is not such a good idea. If you have to, leave up to two weeks between applications and if you are declined for a loan, ask the lender why so you can try to resolve the situation.

Find the best loan for your needs with soft searches, though, and at this stage you should be able to apply and start borrowing.

                  

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