Your credit score is a three-digit number that reveals information about your credit history, made up of the number of inquiries, the amount you owe, payment history, credit types, and credit utilisation ratio. Every lender will always look into your credit report when you apply for a loan, including a car loan. The three-digit credit score determines how committed you have been with payments in the past. It reflects your repayment habits over a period of time, which cannot be determined solely by your income.

You do not need to have a credit score to purchase a car as long as you pay for it outright. However, if you have your car financed from a direct lender or car dealer, you will certainly need a credit score, but there is no bare minimum universal credit score.

How does your credit score affect your car finance?

Whether you apply for a car loan or a car finance deal such as Hire Purchase and Personal Contract Purchase, your credit score will influence interest rates and repayment terms.

Higher credit scores mean lower interest rates. Lenders will more likely be offering more favourable loan terms. If your credit score is less than perfect, you will be perceived as a highly risky borrower. As a result, you will face high interest rates. Repayment terms will also not be generous.

Does a bad credit score mean denial?

A subprime credit rating will not result in rejection. There are some lenders who accept applications from subprime borrowers, but they charge very high interest rates. At the time of applying for these loans, you must ensure that your credit score matches their acceptance criteria.

Bad credit approval does not mean that all bad credit score ranges are accepted. Lenders usually set the bare minimum score, which means no applications with less than that score will be accepted. For instance, if the minimum score is 500, and your credit rating is 450, your application will be straightaway turned down.

What if you have a CCJ?

If you have a CCJ, most of the lenders will not be able to provide you with a larger sum of money. Car loans require a down payment.

• It must be 10% if your credit score is stellar. However, you are free to pay more upfront.
• It must be at least 20% of the car’s value if your credit score is less than perfect.
• If you have a CCJ, you might not be able to qualify for a car loan even if you have a larger deposit, say 50% or 60%. However, this may not preclude you from applying for vehicle repair loans. It is worth bearing in mind that the CCJ must be satisfied.

Vehicle repair loans with bad credit are aimed at those who already own cars and need money to pay for unexpected repair work. These are small personal loans that do not lend you more than £1,000. Most of the time, they are paid back in one go. Some lenders may allow you to pay them back in fixed weekly instalments.

Lenders do not use credit scores calculated by credit bureaus

There are three credit reference agencies from which your credit score could be collected. These credit reference agencies are Experian, Equifax and TransUnion. These agencies have their own formula to calculate your credit score, and hence they will vary by credit bureau.

You can receive a free copy of your credit file once a year to know what your credit looks like. Self-checking does not leave any footprints, and therefore, your credit score will remain the same. Lenders demand your credit record from credit reference agencies, which could be anyone, but they intend to collect your credit information rather than know your score.

Based on the credit information they receive, they use their own methods to determine how risky it is to lend you money. It is likely that their credit score is lower than the one you have in your credit report.

Nobody knows what formula lenders use to calculate the risk involved in lending you money, nor is it publicised by them. Even if your application is turned down, they might not inform you of the reason for this, especially in detail. Maintaining a good credit report will help lenders perceive you as less risky.

Ways to improve your chances of improving your credit score

If you want to increase your chances of qualifying for a car loan, you must have a stellar credit report. Here is how you can ameliorate your credit score:

• Pay your bills on time. Whether a loan is to be paid off in one shot or in fixed instalments, any missed or late payment will take a toll on your credit score.
• Avoid being reliant on short-term high-cost debts such as payday loans and small emergency loans every time you need additional cash. This will imply that you are bad at managing money efficiently, and therefore, you always rely on loans to pay for unexpected expenses.
• Do not ignore utility bills, phone bills and broadband bills. ExperianBoost can help boost your credit points by showing on-time payments of your utility bills, rent and the like.
• Your credit utilisation ratio should be lower than 30%. Try to make small purchases with your credit card and pay off the full balance. Carrying a monthly balance will hurt your credit score.
• You should avoid too many credit applications within a very short timeframe. This will demonstrate your desperation for money. Too many credit inquiries will significantly lower your credit scores.
• Check your credit report regularly. You might be the victim of identity theft. Make sure it is not the reason for your low credit score. If so, raise a dispute.
• Do not close your unused credit card accounts, as this will increase your credit utilisation ratio. You should rather overcome your spending temptation.

The bottom line

There is no fixed credit score that you need to apply for car finance. However, aim at having a decent credit rating. You can qualify for better interest rates if your credit score is up to scratch. Bad credit borrowers can also apply for car finance or car loans, but interest rates will not be so generous.