Car finance with fair credit

Not everyone has a great credit score or a terrible one. If you have a middling score read on to see what it means for getting car finance

John Evans
Feb 25, 2020

Cars are typically the second most expensive thing any of us buy, and as a result, most of us need to borrow money to pay for them. As long as you’ve budgeted for the monthly payments as part of your total living costs, that normally works fine. Borrowing money to get a better car can mean the difference between having a safe, reliable and cheap-to-run machine that gets you to work every day without fail and one that is forever breaking down and costing thousands to keep moving.

You may have read about car finance options for those with top credit scores and others catering for those with low scores, but what do you do if you have a fair score? Fear not, there are a number of finance options available. Go for a contract with monthly payments that are affordable compared with your income and outgoings and you have every chance of finding a good deal. Yes, you'll pay a bit more interest than those with the highest scores, but you should also have much less interest to pay than those with a bad credit score.

Whether you'll be approved for finance on the car you want comes down to your credit rating, which plays a large part in determining how much interest you have to pay. Everybody has a credit score. Like a passport, it’s extremely valuable but unlike a passport, you can’t see or touch it - it's a rating held by different 'credit reference agencies'. This is why many of us don’t give our credit rating a second thought – and that’s where the trouble starts.

Keep reading to understand what having a fair credit score means and what you can do to improve your credit rating, to boost your chances of getting car finance and cut down the amount of interest you're charged. Meanwhile, there are several steps you can take to find out whether your credit score is high enough for car finance, or to build a credit score, if you don't already have one.

What is a credit rating?

This is a number that lenders use to understand what level of risk a borrower represents - essentially covering the likelihood of the company getting its money back. Someone who has a good record of borrowing money and paying it back on time and in full can expect to have a strong rating. Meanwhile, someone who has fallen behind with payments a number of times can expect to have a low score.

Credit ratings are calculated by organisations called credit reference agencies. There are three main ones: Experian, Equifax and TransUnion. Each uses slightly different scales to classify the risk that borrowers pose. However, they are all trying to gauge the same thing - how risky are you and what chance is there that you'll pay the money you borrow back? Lenders feed their ratings into their own calculations to establish whether the company should lend you money or not.

While some lenders focus on the people with the highest credit scores, others target those with lower ratings. If you have a fair credit rating you should be able to take advantage of lower interest rates than people with a lower score, but are likely to have to pay more than those with perfect credit histories.

How is your credit rating calculated?

It’s calculated with reference to many factors, both financial and personal. Among the many things the agencies feed into their rating calculations are your current borrowing commitments and repayment record (note that things you pay for monthly including your mobile phone and insurances are also classed as loans here), the number of credit cards you hold, plus how long you have held and how you manage your bank account.

It may come as a surprise to know that having little financial history can influence your rating because the agencies have less evidence to go on, so they assume the worst. If you have no credit history, however, don't worry. It is possible to build a credit history, though it may take several months to do so.

Meanwhile, at a personal level, the agencies consider your employment status (whether you're employed, self-employed or unemployed), your address and the length of time you’ve been there, whether you are on the electoral role – and therefore settled and easily traceable – and if you have any county court judgements against you for non-payment of fines and debts. Being in a financial partnership with someone who has a bad finance history will also be taken into account. If their credit score is worse than yours, it can pull your score down.

Why does a credit rating matter?

Your credit rating is the single most important piece of evidence a lender has to gauge your ability (or inability) to repay a loan. After all, they don’t know who you are or how trustworthy you may be, which means they have to rely on this type of data.

You could claim to be the most honest and financially responsible customer they have ever encountered but without evidence to support this, they have to assume that you're just as likely to miss a payment than anyone else.

What is a fair credit rating?

The finance industry classifies borrowers according to five ratings groups to show what kind of a risk they are. These bands vary from bad to excellent. Roughly speaking, each group accounts for around 20% of borrowers, although those judged to be good (one down from excellent) account for around 25% of the total.

The fair category sits in the middle, between those with poor credit scores who may have a history of failing to make monthly payments and those in good or excellent categories, who are likely to have plenty of evidence of borrowing money in the past and paying it back on time.

For credit reference agency TransUnion, someone judged to have a fair rating has scores ranging from 566-603, while for Equifax the range is 380-419 and for Experian, 721-880. As the numbers vary, it's worth focusing instead on the band you fall into, to gauge how to approach getting car finance.

To an outsider, someone judged to have a fair credit rating sounds like they are probably in a good position to borrow money. In fact, this type of borrower sits between those judged to be poor (one up from bad) and those judged to be good. They are certainly in a better position to borrow money than the former and possibly at a lower interest rate, but not in such a strong position as the latter.

What are the benefits of a fair credit score?

Unlike someone judged to have a poor credit rating, your chances of being approved for a loan are higher and you are less likely to have to pay a fee or a large deposit. You may be offered a lower interest rate, too, reducing the total amount you have to pay back.

On that point, don’t underestimate the capacity for lenders to change rates according to the type of risk they think you represent - even within the same credit rating band. For example, recently one major high street bank each offered two brothers of similar ages, both employed and registered at the same address, a loan for the same amount – one with an interest rate of 7.9%and  the other, 3.4%.

The brother who was offered a lower rate simply had a more extensive financial record including renting, a phone contract in his own name, a credit card, monthly utility bills and so on. This clear track of borrowing money and paying it back provides borrowers with more confidence and in turn, they may offer you a better rate.

How can I raise my credit rating from fair to good?

The good news about credit ratings is that you can change yours. This can be by actions that show the reference agencies you are a responsible borrower. They include closing any dormant bank accounts and surplus credit cards, avoiding making multiple loan applications in a short space of time, clearing existing debts, making loan payments on time, closing any joint accounts shared with people with low credit scores and making sure you’re on the electoral roll. These don't make a difference overnight. It can take a few months to filter down.

You also have a right to see and check your credit record. It can be accessed for free directly through the ratings agencies. Challenge any errors you find, ensuring the agency issues a notice of correction. It has 28 days to update its report or explain why it believes it is accurate. Together, these steps may get you from a fair to a good credit rating, in the process increasing your borrowing capacity and reducing your borrowing costs.


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