When it comes to car finance, your credit score is a key factor that lenders consider when determining whether to approve a loan and what terms to offer. A credit score is a numerical representation of your creditworthiness, based on information from your credit report. It reflects your borrowing and repayment history, as well as other factors such as the length of your credit history and the types of credit accounts you have.
There are several things that car finance companies may look for in your credit report when considering your application for a car loan. Some of these include:
- Payment history: Lenders will want to see that you have a history of making on-time payments on your credit accounts. Late or missed payments can be a red flag and may negatively impact your credit score.
- Credit utilisation: This refers to the amount of credit you are using relative to the amount of credit available to you. A high credit utilization ratio (using a large percentage of your available credit) can lower your credit score.
- Credit mix: Having a diverse mix of credit accounts, such as a mortgage, credit card, and car loan, can be seen as a positive by lenders.
- Length of credit history: A longer credit history can be seen as a positive, as it shows that you have a track record of borrowing and repaying credit over an extended period of time.
In addition to these factors, car finance companies may also consider other information from your credit report, such as the number of credit enquiries you have made (which can indicate whether you are taking on too much new credit) and any bankruptcies or foreclosures that may be listed.
Is a good credit score important when applying for car finance?
The importance of a good credit score cannot be overstated when it comes to car finance applications. A higher credit score may result in a lower interest rate on your car loan, which can save you hundreds or even thousands of pounds over the life of the loan. On the other hand, a lower credit score may result in a higher interest rate, which can significantly increase the overall cost of the loan.
If you are looking to improve your credit score for the future, there are several steps you can take:
- Make all of your payments on time: This is perhaps the most important factor in determining your credit score. Late or missed payments can have a significantly negative impact on your credit score.
- Keep your credit utilisation low: Aim to use no more than 30% of your available credit at any given time.
- Diversify your credit mix: As mentioned above, having a diverse mix of credit accounts can be seen as a positive by lenders.
- Avoid making too many credit applications: Each time you apply for credit, it generates a credit inquiry, which can have a negative impact on your credit score.
- Opt for soft credit searches: If you need to apply for finance, try to apply with companies that will over pre-approval based on a soft credit search. A soft credit search cannot be seen by other lenders, so will not impact your score.
How can I check my credit score?
You can access your credit score through several sources, including credit bureaus (such as Experian, Equifax, and TransUnion) and credit monitoring services. Some credit card companies and banks also offer free credit scores to their customers. It is a good idea to check your credit score regularly to ensure that it is accurate and to stay on top of any changes that may be affecting your creditworthiness.
As you can see, car finance companies consider a number of factors when evaluating your credit report, including payment history, credit utilisation, credit mix, and length of credit history. A good credit score can result in a lower interest rate on your car loan, while a poor credit score may result in a higher interest rate. By taking steps to improve your credit score, you can put yourself in a better position to secure favourable terms on car finance in the future.
Looking to apply for car finance? Marsh Finance offers a FREE pre-approval check, that has no impact on your credit score due to only requiring a soft credit search. Apply online now to check your eligibility!