If you’re preparing to apply for car finance, you need to check your credit score. Here’s how...
Your financial history is a hugely important part of your application for car finance. Variously known as your credit score, credit history and credit rating, it can dramatically affect your chances of being accepted for finance and the interest rates you’re offered.
Everyone has a credit score, whether you’ve taken finance out in the past or not, and it’s used by lenders to establish your risk as a borrower. Your credit rating is a score, and it represents your provable history of paying back money you’ve owed. If you’ve never used credit – whether through taking out finance, or using a credit card, or having a contract mobile phone – then lenders will find it difficult to decide how risky it is to lend you money.
Because lenders are extremely risk averse, having a low or bad credit score means you may find it hard to be approved for car finance, or you might find that your quotes come with high interest rates to compensate for what the lender sees as a bigger risk in lending to you.
Luckily, there are ways to improve your credit score. Establishing a history that proves you can be trusted should make your future finance applications far easier.
There are three main credit reference agencies – TransUnion, Experian and Equifax. They will each have compiled a file on you based not only on your past credit and borrowing, but also public information such as your previous addresses from the electoral roll, any county court judgements and bankruptcy and insolvency data.
Each rating system works in a slightly different way, so there’s no single universal credit score. You can check what your ratings are with each agency for free, and it’s a good idea to do so before you apply for credit or finance – mistakes can happen, so make sure your history is accurate to avoid unforeseen problems.
Everyone has the right to see their credit files. However, each reference agency lets you access your information in different ways, and some of them come at a price. Some will let you sign up for a 30-day free trial – you can just cancel it before you’re charged.
TransUnion will let you see your score and report for free through its own service, which is called Credit Karma. Experian lets you start a 30-day trial through its CreditExpert service, although you can see your score alone for free. If you do continue its service after the 30-day trial, it’ll cost you £14.99 a month and you’ll get alerts every time your file is updated. Equifax has a similar setup to Experian, with free trial and then a £14.95 a month charge.
If you want to check all three agencies at once, you can use a service called Check My File. This also offers a free 30-day trial, and then costs £14.99 a month
Each of the three reference agencies uses a different scale to assess your credit eligibility, and your rating will be represented as a score. The scores are all out of several hundred, and put you in a particular band that represents your risk to lenders. These bands range from Very Poor to Excellent and, as you might expect, the higher band you sit in, the better your chance of getting credit and favourable terms.
TransUnion scores are out of 710, and the bands are divided like this:
Experian scores are out of 999, and the bands are divided like this:
Equifax scores are out of 700, and the bands are divided like this:
Simply, your credit score is based on your past performance in repaying credit, from loan applications to credit card usage to mobile phone contracts.
You should be aware that it’s easy to negatively affect your score – a missed payment can cost you a lot of points, as can other factors like not being on the electoral roll, having a county court judgement against you or making too many loan applications. Even being linked to someone with a poor score can also negatively affect your rating.
Keep in mind, however, that your credit score isn’t the only thing that lenders look at when considering your application. They’ll look past the score to your whole file, and also consider any past dealings. Then there’s the application form and the information you give them there, much of which won’t be in your credit file. This underlines the need to get the information on your application correct, as it could make a big difference to your chances of success.
You may have never struggled to get credit or a loan before. Perhaps you think that checking your credit score is something for those less fortunate than you.
But that may not be the case – the finance industry is getting increasingly sophisticated with the way it lends, and your scores might not be as high as you think. As an example, where lenders might previously have turned down an application they could now charge a higher interest rate instead. You may have seen the term ‘representative rate’ in advertised quotes for car finance. By law, more than half of borrowers must be offered the advertised rate, but those accepted (but not as credit worthy) will likely be offered a much higher rate.
You should also note that if you haven’t borrowed before, then your credit score probably isn’t very high. If you don’t have a demonstrable history of financial reliability, then lenders won’t have evidence about how much of a risk you are.
A hard search is a credit check that shows up on your credit file – the record checked by potential lenders when they assess you as a potential customer. Hard searches can be triggered by loan, mortgage or credit card applications, as well as when you sign up for a new phone or internet contract.
Unlike a soft search, which gives lenders a general idea of whether or not you’re likely to be suitable, a hard search leaves a trace on your credit file that can be seen by lenders, usually for up to 12 months.
This can cause issues. As far as the credit reference agencies are concerned, a hard search represents an application for a loan, and suggests that you need to borrow money. That therefore suggests that you’ll have less money available to pay back future loans, and can reduce your credit rating and score.
If you simply take out a loan with your first application then it’s unlikely to be a problem, but if you shop around and trigger several hard searches, it’ll seem to the credit agencies that you’re taking out multiple loans. Remember, the credit industry is very risk averse, and they’ll likely jump to the worst-case scenario – even if it isn’t accurate. Your credit rating could be lowered further, to the level where you’ll find it difficult to get approved for future borrowing.
As an indicator, lenders will consider six hard searches in a short period of time to be too many – research has shown that those that trigger that many are eight times more likely to file for bankruptcy.
All this means you should only make a loan application when you’ve done all your research and ensured that you can afford it. Until then, stick to soft searches. Although these are noted on your credit history, lenders won’t see it and it won’t affect your credit score. You can use things like eligibility checkers to see where you stand in terms of a potential loan. These won’t damage your rating.
You could also check your credit status without affecting your rating through a company like ClearScore. This will show you what credit band you sit in, giving you an idea of whether you’re likely to be successful in your application or if it would be a better idea to improve your score first.
While lenders won’t see soft searches on your credit file, insurance companies could see searches made by other insurers. Should you let a debt settlement company access your report, it might also share its enquiries with companies that you owe money to.
Regardless, you can make as many soft searches as you like without impacting your creditworthiness. All of which means you should ensure when shopping around for the best car finance deal (or, indeed, any other kind for credit), make sure that only soft searches are being performed each time you get a quote.
As detailed above, avoid hard searches until you need to make an application, and if you have to make more than one then space them out as much as you can. Plan ahead accordingly so that you’re not making multiple applications in a short period of time.
Check your credit history to make sure there are no mistakes – they can happen, but you can report them to the credit reference agencies who will investigate and, if your concerns are substantiated, they’ll amend the record accordingly.
Make sure you’re registered to vote at your current address, and above all, make sure your financial affairs are in the best possible shape. Pay off your debts and pay all your bills on time. Doing this will all feed back into the credit reference agencies and build up your score.
As well as making sure your financial affairs are in good shape, as detailed above, think carefully about how much money you really need to borrow. Asking to borrow less money, by paying a larger deposit or picking a cheaper car, will see your application more likely to succeed.
Keep in mind that a lender will probably decline a loan that totals more than 25% of your net salary. Don’t get too ambitious with your borrowing, and be realistic when considering your income and expenses. Remember that the lender will see your credit file, so be as truthful as possible in your application.
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