What is bad credit?

If you have bad credit, car finance can be difficult to secure. But it's not impossible. Read on to find out everything you need to know

Sam Naylor
Jan 19, 2022

Car finance has become by far the most popular way for drivers to get themselves a new set of wheels. It makes the process of purchasing a car much more affordable, and there are many different types of finance that suit particular needs - but if you have a bad credit rating, it can be harder to get approved than if you were to have a middling or good score. Here we explain what bad credit means for those looking for car finance, and what the best steps to take are for those with bad credit scores so you can maximise your chance of getting car finance.

Being approved for car finance depends a great deal on your credit rating, and how much interest you will pay is also based on your specific score. Everyone has a credit score, even those who have never taken out finance before.

Your credit score is something to be aware of because the credit agencies keep a file on you whether you like it or not. Find out how to build your credit score here if you have little or no credit history, as this should boost your odds of being approved in future.

Read on to find out what a bad credit rating is and how it’s calculated, plus how this affects car finance and what you can do to improve your credit score. First, let’s look at what a credit score actually is.

What is a credit score?

Your credit score is a number that is used by finance companies to determine how likely you are to pay back money loaned to you and this falls into a number of bands. It shows a potential lender whether you’re likely to make payments regularly and without delay - in which case you’d have a good rating - or if you’ve missed payments in the past and may continue to do so - in which case you’re more likely to get a bad rating.

There are three main agencies that assess credit scores, which you may have heard of: Experian, Equifax and TransUnion. Each one has its own way of working out a credit score for you, but all of these ratings mean broadly the same thing and have a scale that goes from bad to good, with your individual score falling one of these bands.

You’re given a points score based on your history with finance in all ways, whether it’s a credit card, car finance or a mortgage. This score places you in a band that lenders can look at when they are considering whether to offer you finance.

Your current financial commitments are taken into account, for example monthly credit card payments, mobile phone contracts or insurance payments. They also look at how many credit cards you have and even how you manage your bank account.

Other factors are considered as well, including whether or not you’re employed, how long you’ve lived at your current address, whether you’re on the electoral roll (essentially whether you're registered to vote) and if you have any county court judgments against you for failing to pay fines or debts.

You can use the Experian, Equifax and TransUnion websites to find out your credit score. Click on the button below for more info on how to find out your credit score.

What is a bad credit score?

A bad credit score isn’t technically a category that the finance companies use - rather, the categories it’s possible to sit in are typically Excellent, Good, Fair, Poor and Very Poor. You can say you have a bad credit rating if you have a Poor or Very Poor score.

It varies a bit depending on which agency you look at, but since lenders are able to access any or all of them, this doesn’t matter too much. The thing to focus on is that if you have a bad credit rating then lenders will be able to see that and change what they offer you accordingly.

You’ll most likely find yourself in the lower categories if you have a history of missing finance payments or you have a large amount of debt. This is the most obvious cause, but there are others.

If you’re in a financial partnership with someone who has a poor or very poor credit rating, this can bring your own score down, for example. Another factor is for those who have no credit history at all - the companies will usually assume the worst in this case - as they have no evidence of you borrowing money and paying it back - and you could have a bad credit rating through no fault of your own. However, it’s much easier to build a good rating when you’re starting from nothing.

How does bad credit affect car finance?

Lenders use your credit rating to determine how much of a risk you are when taking out a loan. They need to know how likely it is that you will pay back the money they are lending you promptly and fully - after all, would you lend a tenner to someone who you know never pays it back?

Lenders may refuse to approve you for car finance if you have bad credit. That’s the worst-case scenario, but there are often other solutions where lenders can still approve you, just with some changes to the agreement.

Most of the time this means you’ll get a higher interest rate than someone with better credit, so you'll end up paying more money back over the same amount of time. You may also have to put down a bigger deposit at the start of the finance arrangement or simply be able to borrow less than someone with a higher credit score to reduce the risk to the lender.

We’ve covered this topic in great detail in our article on how to secure car finance with bad credit. Read this to understand what you can do if you have bad credit and want to purchase a car using finance.

You can also find some great cars in our articles covering the best bad credit car loans and the best bad credit car finance deals.

Can you improve your credit rating?

You can see your credit score through the companies mentioned above for free, yet what you may not know is that you can challenge any errors that you can see in the record. The credit agency then has to review your submission and either remove the error, which should boost your credit score, or explain why it still stands. This is one way to improve your score if you feel there is a mistake on your record.

Yet for most people, improving your credit score can’t be done overnight. It takes some time but it is very much possible to get rid of a bad credit rating. The most important thing to do is keep up with finance payments - pay the money on time and never miss a payment. Gradually, this will bring up your score.

You can also close down bank accounts that you’re not using, reduce the number of credit cards you have and close any joint accounts if the other person has bad credit as well. Avoid making multiple loan applications over a short period if possible, too - and get yourself registered to vote, as being on the electoral roll boosts your score.

It may be worth considering a cheaper car than you initially wanted if you’re applying for bad credit car finance. That way, you’re more likely to be approved - as you're borrowing less - and more easily be able to afford the payments. Furthermore, this helps you to build a better credit score for next time.


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