Is my credit score good enough to get car finance?

You may have read the car brochures and reviews, compared trims and scrutinised economy and emissions figures. But there’s still one more thing you should do before setting out to purchase your next car - check your credit score.

Compared with the exciting prospect of driving away your new set of wheels it may sound incredibly dull, but if you have a slightly rocky history with money or even if you think your financial record couldn't be better, it's worth checking your credit score before financing a car.

That’s because a poor credit score could mean you being refused finance for the car you've set your heart on, while a mediocre one may result in you making multiple applications in search of a better deal that will only make your score lower still.

So, our advice is: be prepared and make sure you have a good idea of your credit score before you approach a lender and you should be able to get the best available deal. Keep reading to find out how what credit scores are and how they are calculated.

Car finance: what is a credit score?

A credit score is a rating based on aspects of your personal and financial histories that helps lenders to determine how likely you are to repay a loan and, therefore, how keen they will be to lend to you.

These numbers may be unique to individual lenders but they will be based on credit scores calculated by one or all of the three major credit reference agencies (Experian, Equifax and TransUnion) that compile loan and personal data on all of us.

The point is, there is no one industry-wide credit score for an individual. Instead, there are at least three, plus - potentially - each lender’s own score. However, while these scores may differ between agencies and lenders, what they tell lenders in practice is broadly the same. This means that if you have a strong credit score with one, you're likely to have a high score with the others, too.

How can I check my credit score?

Contact the three credit reference agencies and ask to see your reference file. By law, this should be free but they may try to bundle your request into a paid-for service offering regular updates.

If that’s the case, contact their partner companies who will let you see your file for free. Experian’s partner is Money Saving Expert's credit club, Equifax’s is Clear Score and Trans Union’s is Credit Karma.

How is a credit score calculated?

By a reference agency

A credit score is calculated, firstly, by the credit reference agencies. It is based on a report they produce that contains records of your financial dealings and aspects of your personal history.

Financial data includes evidence of current and previous loans, utility contracts (for example, those with energy suppliers) and phone contracts, plus your repayment history concerning them. If you’ve missed repayments or defaulted on debts, these will negatively affect your credit score. Having multiple bank and credit card accounts will also affect your credit score since they increase your exposure to additional lending.

In terms of personal history, a credit score will assess your employment status (out of work, employed or self-employed) and address (whether you have one, how long you’ve lived there, and whether you are on the electoral roll - meaning you're registered to vote). The score will also consider financial relationships with people or partners who may themselves have a good or bad credit score. If you have a joint account with someone who has a poor credit score, this is likely to negatively affect your own credit score.

It will also take into account any county court judgements (CCJs) you have been issued for failure to pay fines or debts and whether you have entered into an individual voluntary arrangement (IVA) to clear outstanding debts.

By a lender

The resulting credit scores calculated by the agencies are helpful to lenders because they save them the trouble of poring over your financial and personal history when you make a loan application.

Instead, they can spend time asking you about your income and outgoings, so they can see whether you can afford to repay a loan. They’ll also want to know if you have a criminal record, parking or driving fines, student loans and council tax arrears.

Based on what you tell them they’ll combine this information with the agency’s credit score to calculate their own in-house credit score upon which their decision to lend you any money - or not - rests.

Car finance: what is a good credit score?

As the three major credit reference agencies have their own scoring system, it’s not possible to say definitively. However, they do at least group their scores into bands so that lenders can see what level of risk a customer represents at a glance. There are five bands labelled very poor, poor, fair, good and excellent.

The scores calculated by TransUnion and Equifax range from 0-710 and 0-700 respectively. The higher the number, the better the rating. For TransUnion the band for a person they deem to be a good risk spans from 604-627 but for Equifax, it's 420-465.

Experian’s credit scores range from 0 to 999. It defines a good risk as someone with a credit score of 881-960.

Being regarded as a good risk is important because it means that, assuming the lender is also confident that you can repay the loan (based upon your earnings, outgoings and how much you're looking to borrow), you have a better chance of not only getting a loan but one with a low interest rate, too - meaning that you would pay less overall.

Having a fair score (TransUnion 566-603, Equifax 380-419 and Experian 721-880) won't bar you from being given a loan but it's likely to be at a higher interest rate - increasing your monthly payments - and for a lower amount than you might want.

How can I improve my credit score?

You have a number of options to boost your chances of getting the loan you're after. First, it's worth checking your credit record and if you notice any errors or information that needs updating or clarifying, tell the credit reference agency immediately.

They will mark your file as being disputed and have 28 days to update the report it or explain why they believe it’s accurate as it stands. Also speak to the lender who gave you the information to see if you can resolve it that way.

Review your finances and see if there are loans you can settle, surplus credit and bank accounts you can close and questionable financial partnerships (a joint account with someone who has a low credit rating, for example) that you can terminate.

These actions will be fed back to the credit reference agencies and your record updated and score adjusted, although it can take weeks or even months, rather than days for this to happen. Also, with reference to the lender’s questions concerning your ability to repay the loan, review your income and costs, and be sure you are being realistic about what you can afford to borrow.

Extravagant spending habits on things you don't need could prevent you from getting a larger loan on a car you do need, so cutting these costs could be crucial. Presenting a realistic case to a lender may make all the difference to your chances of getting that loan.

Read our guide to how to maximise your chances of being approved for finance to give yourself the best chance of getting the car you want for a monthly payment you can afford.

What is an excellent credit score?

Credit reference agencies look at all the information in your history and based on what it tells them about you, award you a credit rating. This rating, also called a score, falls into one of five bands which most of them label as 'very poor', 'poor', 'fair', 'good' and 'excellent'.

Most borrowers have a fair to good credit score which, among other things, means they have an active but well-managed credit history, meet repayments - though potentially with ocassional late payments - and use their credit card responsibly.

Contrary to what you may think, people with an excellent credit history don’t borrow less money than others. Instead, they have an even more active credit history that is even better managed than those people with a good history, most likely making every payment on time, with no slip ups. 

How can I check if I have an excellent credit score?

It’s your right to check your credit history and what’s more, it’s free through credit reference agencies including Experian. You can check this agency’s records with ClearScore, too.

Alternatively, Check My File represents multiple credit reference agencies whose scores you can check for free for up to 30 days from signing up for the service.

How does having an excellent credit score benefit me?

An excellent credit score isn’t just a badge of honour - it’s your key to unlocking lower interest rates and a wider choice of finance deals than people with less impressive credit ratings.

However, having got to this exalted position, it’s important you don’t damage your record by, for example, borrowing more than you can afford or missing payments. Just as having an excellent credit score unlocks the best deals, any financial blips could see you score quickly tumble.

What savings can I make with an excellent credit score?

The cost of a loan is directly linked to the interest being charged, which in turn is linked to your credit score. In short, the better your history and the better your financial position, the lower the interest rate and the less your loan will cost you.

BuyaCar caters for those with everything from a poor to an excellent credit score, with different interest rates charged depending upon the band you're in. Someone with a poor credit score may be eligible for a rate of 18.9% APR, while an average score could make 14.9% APR available, a good history 9.9% and an excellent history 7.9% - potentially as low as 6.9% APR in some cases.

The difference between the lowest and highest rates, therefore, is 12% APR, which can make a significant difference to monthly payments and the overall amount of interest charged.

We picked out a 2018-registered Ford Fiesta with 10,000 miles on the clock and a cash price of £11,000. We compared Hire Purchase quotes for a four-year contract with a £1,000 deposit to see how the numbers added up for those with different credit scores.

Someone with an excellent credit score can expect to save themselves around £50 per month compared with someone with a poor credit score. Meanwhile, lower interest rates for the driver with the excellent score mean savings of £2,400 over the four-year contract, compared with poor credit finance.

Even compared to someone with a good credit history, having an excellent credit score could save you £432 over the term of the contract - potentially equivalent to the cost of a couple of services for the car - while compared to someone with an average credit history, they could save as much as £1,392 in interest.

These are typical BuyaCar finance rates but those available from external finance providers will be different and potentially much higher in some cases.

How can I get an excellent credit record and access better rates?

The great thing about a credit record is that it is possible to improve it. It won’t happen overnight but managing your finances better, closing dormant accounts, severing financial ties with someone who has a poor credit record and making sure you’re on the electoral roll (simply search 'register to vote' to find the government website where you can do this) is a great start.

If you’re struggling with repayments, contact your lender and ask for help rather than letting the situation get out of control and falling behind with payments, which would likely cause damage to your credit score. Meanwhile, check your credit history for errors that could be harming your score. If you find any, contact the respective agency as they have to correct these.

In addition, make repayments on time and try to repay more than the minimum amounts, each month. Keep your credit card balance to a minimum. Avoid making multiple applications for credit in a short space of time because this makes it look as if you’re struggling to meet your commitments or simply overstretching yourself financially. We all use our overdraft from time to time but don’t exceed your agreed limit.

Do these things and slowly but surely you will move higher up the credit ladder until one day you move from average to good and ultimately to excellent at which point a world of even lower interest rates and better deals opens up to you.

What is a good credit rating?

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.

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.

Someone judged to have a fair credit rating 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 likely to be able to access lower interest rates, but not in such a strong position as the latter.

What are the benefits of a fair credit score?

Unlike someone with 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, two brothers of similar ages, both employed and registered at the same address, could apply for a loan for the same amount, but one might get an interest rate of 7.9% and the other 3.4%.

The brother offered a lower rate could simply have 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 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. This could 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 to be on the electoral roll. These don't make a difference overnight and 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.

What is a very poor credit rating?

The bands that credit agencies use to group individuals' credit scores are Excellent, Good, Fair, Poor and Very Poor - so as you can see, a very poor credit rating is as bad as it gets, right at the bottom of the scale. As you also have a numerical score, though, you could be close to stepping up into the ‘Poor’ bracket or right at the very bottom of the scale with an extremely low score.

Lenders will be able to see which band you are in when considering you for a loan, whether that’s for a traditional loan, PCP car finance or Hire Purchase - any kind of finance. Your score helps lenders to assess whether to lend you money or not. Those with the lowest score may be the least likely to be approved for finance with traditional lenders, though other finance companies may cater for those with the lowest credit ratings with specific products.

The most likely reason people may find themselves in the very poor category is because they have a history of missing finance payments or a large amount of debt. There are some other causes but they will have a smaller impact on the score than these.

Having a joint bank account with someone who has a low credit score is another potential reason, as this can drag down your score as well. Those who have never borrowed money, meanwhile, may also find themselves in this category, as lenders have no evidence of them borrowing money and paying it back, so they tend to assume the worst case scenario. However, it’s fairly easy to start building a good credit score when you have no credit history.

Can you get car finance with very poor credit?

Lenders want to know when they’re considering offering a car loan or car finance how likely it is that you will pay back all of their money on time. Managing this risk is their job - and they use all the tools they have to do it, the main one being your credit score.

With a very poor rating, you may find that many lenders will refuse to offer you car finance. Some may consider you with a few conditions, as long as the amount you are asking for is reasonable to them. This means that the cheaper the car you consider, the more likely you are to be approved if you have very poor credit.

Options available to the lender could include offering you a loan with a high interest rate - as this means they get more money back sooner, to cover their increased risk of you failing to make payments on time or in full - so you’ll have to pay back more than those with a better credit rating. Lenders could also ask you for a bigger deposit than they might otherwise or only give you finance on a cheaper car, to reduce their risk.

Can you improve your credit rating?

The good news for anyone with a very poor credit rating is that you can improve it. There’s no overnight fix, as the only way to bring up your score is to keep making payments on time consistently to prove to lenders that you can be trusted to do so. The longer you can keep up payments in full for all your financial commitments, the better your score will get.

Any bank accounts that you’re not using should be closed down, and the same goes for credit cards and joint bank accounts if the other person doesn’t have good credit. Registering to vote can help if you’re not already on the electoral roll.

As you keep making payments and start to clear away debt, your credit rating should rise. Just remember to keep these good habits up even if you get back to a better score in the future, as you'll need to maintain this score.

It is also possible to challenge the credit agencies if you spot an error, for example a recorded missed payment that you actually paid on time. The agencies have to check this and remove it if it’s a genuine mistake, which could help you to improve your credit score and be able to take advantage of better deals.