Fair credit score loans

With interest rates at historically low levels you’d think that borrowing money should be cheap and easy, but for many people the opposite is true. If you have a credit score that falls into the ‘fair’ band - or worse still, the 'poor' band - getting car finance may not be as simple as it could be. And for those with lower scores it could be pricey.

As you'll see below, depending on the value of the car, you could easily end up paying around £2,600 more in interest charges with a fair credit score than someone with a good credit score. Consequently, you can benefit hugely by spending time to find the best interest rates available to you, while if you're looking to try and reduce those costs further still your best bet is to work on improving your credit score. The best place to be is within the excellent credit band, at which stage you can take advantage of the lowest interest rates. 

If you're still baffled by what a credit score is, how your score is calculated and why having a fair one could prove more expensive for you than being in a higher band, read on.

What is a credit score?

When you apply for a loan, the lender has to be confident that you'll be able to repay it. They’ll ask you affordability questions to ensure that you're in a reasonable financial position to be able to make the payments and then check your credit history - which is a record of your past borrowing behaviour - with credit reference agencies (there are three major ones).

So that lenders don’t have to trawl though every last payment you’ve made or missed, the agencies give you a score that reflects how good or bad a borrower you have been. Depending on the specific agency scores typically range from 300-850 points. They’re grouped into five bands spanning what most agencies term poor (typically 300-350 points) to excellent (750-850).

Where does a fair credit score fall?

A fair credit score falls between a poor and a good one. In terms of numbers it spans approximately 580 to 670 points (though the precise numbers vary as agencies have different scoring systems). Meanwhile, a good credit score typically spans around 670-750 points.

As you can see, someone with a score of 660 points could be just 10 points away from lower interest charges and better terms. This means that knowing your exact score can give you a good idea of your chances of moving up - or down - to the next band.

This is useful as it gives you an indication of your likelihood of being able to move up to the next band in the near future. If you're looking to finance a £20,000 car and your credit score currently sits at the very top of the fair band, for instance, you may want to hold off buying the car until you've moved up into the good band, because this could unlock better value finance deals with lower interest rates that could save you a substantial amount of money.

On the other hand, if you're at the bottom of the fair band, you may want to secure the best deal you can now, rather than risk falling into the poor credit band, where it could prove more difficult and costly to secure finance.

Why would someone have a fair credit score?

People with a fair credit score are considered to be what the industry calls ‘sub-prime borrowers’. They will almost certainly have been late making several payments or, worse, missed some of them, regularly be in their overdraft, well towards their credit limit on credit cards and/or have made a number of recent loan applications.

Other things that contribute towards having a fair credit score are not being registered on the electoral roll (meaning you are registered to vote, which provides valuable proof of a settled address) and having county court judgements (CCJs) for outstanding fines and debts.

All this being so, you’d think someone who rarely borrows money and who is an impeccable citizen might avoid being scored as fair but that may not be the case. If you have what credit reference agencies call a ‘thin’ file, lenders don't have much information to use to judge how likely you are to make payments on time and in full. Agencies value having as much information as possible on you and without it award a lower score, to be on the safe side.

Fair credit: how does it affect interest charges?

Your credit score influences the rate of interest you are charged, the maximum amount you are able to borrow and the size of the deposit you are required to pay. A person with a fair score is therefore likely to have to pay more in interest charges and to be offered less favourable terms than someone with a good one.

Like other companies that offer finance, BuyaCar quotes typical interest rates for people with different credit scores. For example, someone with a poor credit score may be eligible for a rate of 18.9% APR, while those with a fair score (what BuyaCar terms ‘average’) could be eligible for 14.9% APR and someone with a good one, 9.9%. The lower the APR figure, the less interest you pay.

The figures in the table below are based on a 2018 Ford Fiesta with 10,000 miles on the clock and a cash price of £11,000, with a deposit of £1,000, financed over four years on Hire Purchase.

It’s possible to see from the table that someone with a fair credit score could have to pay almost £1,000 more in interest charges over four years than someone with a good one. That said, they’re better off than the person with a poor credit score who pays an extra £1,000 in interest over the same period.

The difference in interest charges is clearer still in the case of a more expensive car, such as a 2018 BMW 530i that has covered 13,000 miles and has a cash price of £25,640. Put down a £2,588 deposit and over a four-year Hire Purchase contract someone with a fair credit score could pay £2,532 more in interest than a person with a good one.

The cash differences between fair and good credit scores are equally clear in the case of Personal Contract Purchase (PCP) finance, which offers lower monthly payments than Hire Purchase, but requires the driver to make a large optional final payment if they want to own the car at the end of the contract.

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

First, you need to find out your precise credit score. You can do this for free via companies such as ClearScore and Check My File. At the same time, check your file for errors since these can harm your score. If you find any the reference agency must check and, if it agrees, correct them.

Now you have your credit score, you can see how far from, or close to, the next rating band you are and start to gauge how much effort it will take to get to there before you arrange car finance.

On that point,  remember that your score can go down as well as up, so make sure you don’t miss a loan payment in the run up to taking out new finance, since your payment history is the most important factor in your credit score.

Also work to bring down your credit card borrowing by reducing your spending if you can. That's because credit card debt can account for up to 30% of a credit score, so paying it down as quickly as possible is a good way to boost your score.

If it’s not possible to clear your credit card debt entirely, pegging it at no higher than 25% of your credit limit (£250 of a £1,000 limit, for example) will help to improve your score.

You also want to close any dormant bank or building society accounts that might make you appear overstretched and cut financial ties such as joint bank accounts with anyone who has a poor credit score, as their low score is likely to negatively affect your rating.

Finally, you may want to check whether the credit reference agencies provide tools for improving your score. For example, Experian offers what it calls Experian Boost, a free tool that can improve your credit score by giving you credit for past, on-time utility and telecom payments.