Getting a new vehicle for some is a need and not a luxury that costs a lot of money, which is why people apply for a car loan. You will need to prepare your documents, find a lender, and criticize your options. However, before you can get a loan, you need to know your credit score first.
Based on a credit rating from Equifax and Transunion, the lowest credit score needed for car finance is at least 550. But what is a credit score, and why do you need to check it first before applying for car finance?
Credit Score and Why You Need to Learn How It Works
Credit is money borrowed and needs to be paid to a lender following an agreement, payment due date, and interest. Some customers who purchase things opt to give down payments and then put the remaining balance on credit.
The credit score is a system where lenders evaluate your credit histories. This includes your payment history, old and new credits, credit accounts, and others. It paints the borrowers’ character that directly relates to their credit and payment habits. Understanding the borrower’s credit score helps the lenders decide if they should approve or deny an application.
There are three major credit agencies that record, store, update, and report to the system and calculate if you have enough credit score to finance a car. These agencies are Equifax, Transunion, and Experian, which also have different score ranges and factors.
Where to Get Your Credit Score
You need regularly check your credit score to know what you should do before applying for car finance. You can also contact the credit agencies for your reference file for free, as stated under the law, but they may talk you into availing of their paid service. If this happens, you can turn to their partner companies instead.
Credit agencies and their partner companies:
- Experian: Money Saving Expert’s credit club
- Transunion: Credit Karma
- Equifax: Clear Score
Calculating Your Credit Score
Getting car finance with a bad credit score is a misstep if you plan to get a new vehicle. Poor credit history makes it hard to get a loan and the approval deal you need, no matter what you need it for.
But how do credit agencies calculate credit scores?
Through Reference Agencies
According to their importance, Equifax, Transunion, and Experian use percentage ratings in each factor to determine an individual’s credit score.
Some of these factors that affect your credit score include:
- Payment history. Do you pay on time? Did you miss any payment schedule? Have you ever defaulted on paying your debts?
- Credit usage. How many loans do you have, and what are their balances? How much do you owe? Do you go over your credit limit?
- Credit mix. What other loans do you have? How many credit lines, such as — credit cards, do you own? How do you manage them?
Other factors will be evaluate to determine your credit score, such as any county court judgments (CCJs) and individual voluntary arrangement (IVA).
Through Lenders
As said earlier, credit scores calculated by agencies are essential to lenders and banks because it saves them time during your application.
Instead, they will interview the applicant about their income and financial situation to see if they can repay the loan and the accompanying interest rate. They also ask if you have parking or driving fines, student loans, criminal records, and council tax arrears. They will combine the scores from the agency with their scores to know if they will lend you money or not.
Do You Have a “Good” Credit Score?
There are five levels in the credit scoring system:
- Very poor
- Poor
- Fair
- Good
- Excellent
Transunion and Equifax have the same ranges, from 0-700 but are different in the level they consider “good credit.” For Transunion, it is 604-627, but for Equifax, it is 420-465.
On the other hand, Experian has a higher range. Their credit scores range from 0-999, and a good risk is at 881-960.
Getting at the level of good is essential, but the higher your credit score, the better. It makes the lender more confident that you will be able to repay the loan, and you might even get the loan at a low interest rate.
Car Financing With Your Credit Score
Credit scores will not directly impact the lender’s decision but give them an idea of the risk in offering a credit using the collected data. Lenders also have their credit score, which based on the credit report.
Like the credit history, it also shows your payment history. If it shows missed payments, too many loans, or near the credit limit, this will affect your application. This information combined with all the details on your application and the credit score to finance a car that will make the lenders reach the final decision in a short period.
Get a High Credit Score: Tips Before Applying for a Car Loan
Here the ways to improve your credit score for car finance before applying for an Auto Loan.
- Always pay your bills on time. This includes paying all the past due accounts. Making sure you have a clean record in repaying your debts will improve your score.
- Reduce your revolving debt. The amount of available credit is called the credit utilization rate, and keeping your revolving credit under 30% will have an impact on your score. One of the things that can help is paying your credit card balances.
- Make sure the information on your account is accurate. Always review your credit history and make sure it is up to date.
