Car finance with a good credit score

Shopping for a nearly new or used car rather than paying top dollar for a brand new car is one instant way to save money. If, like a vast majority of new car drivers, and an increasing number of used car drivers, though, you're paying with car finance, there’s another way you can cut your costs - making sure you have a good credit score.

Compared with the thrill of driving your new car, it may sound pretty dull, but having a good credit score is the key to unlocking cheaper car finance. Over the term of a loan being able to access a lower interest rate could save you thousands of pounds in interest charges - money that could help you to be able to afford a better car.

Read on to find out what a good credit score is, how to gauge what your current credit score is and how to improve it.

What is a credit score?

A credit score is a figure calculated by credit reference agencies that gives lenders an indication of the level of financial risk you represent. This is important, as it affects your chances of being approved for finance - and the interest rate you'll be charged if you do get approved.

It’s derived from your credit history, a record held by credit reference agencies that includes details of your past and current loans, and your repayment performance. More personal information such as county court judgements (CCJs) issued for failing to pay fines, and whether you are recorded on the electoral roll (meaning you are registered to vote, which helps to provide proof of your address) is also stored.

Why does a credit score matter?

Your credit score helps a lender decide whether to lend you money and at what cost and serves as an indicator of your future borrowing behaviour based on your past performance. The higher your credit score, the easier it is likely to be for you to borrow money at a lower interest rate and on better terms.

Each credit reference agency has its own scoring system but generally speaking, scores range from 300-850 points. That’s a broad range, so to make things easier, they break them into five bands ranging from very poor to excellent. Roughly speaking, the good band encompasses 670-749 points.

What difference does having a good credit score make to the cost of a loan?

Having a good credit score means that you should be able to take advantage of lower interest rates than those who have a worse credit score - including those in the average or poor bands. On the other hand, it also means that you are likely to have to pay slightly more interest than those with an excellent credit score.

We picked a 2018 Ford Fiesta with 10,000 miles on the clock and a cash price of £11,000 from BuyaCar’s selection of used cars. We compared Hire Purchase quotes for a four-year contract with a £1,000 deposit to demonstrate how the costs vary depending upon which credit band you fall into.

Based on this example, someone with a good credit score can save almost £1,000 in interest charges over the term of the contract compared with someone with an average credit score (also called ‘fair’ by credit reference agencies).

On the flipside, someone with a good credit score is likely to have to pay an extra £400 or so in interest over the four years compared with someone with an excellent credit score.

How can I get a good credit score?

Steps you can take to improve your credit score include making all payments on time and ensuring you never miss one (the worst crime you can commit in credit reference agencies’ eyes). Reduce your balances on credit cards and overdrafts and you can improve your 'credit utilisation' ratio, too. This is the amount of credit you have as a proportion of your credit limit. Aim for a figure of no more than 25%.

Avoid making unnecessary loan applications since each one is recorded as a so-called ‘hard search’ on your credit record that risks reducing your score, with every additional application making it look like you need money more and more desperately. Instead, to find out if you qualify for a loan, opt for an eligibility check such as the one BuyCar offers since this is not recorded on your record.

You'll also want to maintain a good credit age. This is not your age but the age of your oldest piece of credit, which may be a mortgage or another loan. This is because a long-established and well-managed account shows you are financially responsible.

Additionally, it's worth making sure that anything that could compromise your credit score, such as not being on the electoral roll, having a county court judgement against you or being financially linked to someone with a poor credit score, is resolved.

How can I check if I have a good credit score?

It’s free to check your credit history with a company such as ClearScore and Check My File. This should give you an overview of your credit score and show you the information used by credit reference agencies to assess you for finance.

If there are any errors listed that could affect your score, it's worth alerting the respective agency. If it acknowledges these, it must correct them. Read more about how to check your credit score here.