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Your Credit Score evaluates your creditworthiness, based on your spend history - it accounts for things like whether you’ve kept on top of finance repayments and how much you’ve borrowed.

Lenders, like Oodle, use credit scores to figure out how reliable you are at borrowing and repaying money. They use your credit score as one of the ways to decide whether to lend to you at all, and how to structure the finance arrangement if your application is successful. 

But what exactly is it, how is it calculated and what can you do to improve your credit score if you’re struggling to get car finance?

What is a credit score?

 

A credit score is a three-digit number that normally ranges between 300-999. The number is used by lenders to determine your creditworthiness and as an indicator of your future payment performance. 

As a rule of thumb, the higher your credit score, the better your chances of being accepted for credit, and at a more attractive rate. Your credit score influences your chances of getting:

  • Credit cards, loans, and mortgages
  • Car finance
  • Mobile phone contracts
  • Insurance instalment plans
  • Retail credit

If you have a lower credit score you might still be able to get credit but you are likely to have a higher interest rate than someone with a high credit score.

How do Credit Scores impact Car Finance?

 

Car finance companies want to know about your credit history in order to evaluate how likely you are to pay your instalments for your car. A car can be quite a big purchase, so your lender needs to be sure that you’ll keep on top of your repayments.

They will refer to your credit score when deciding whether to approve your finance, and how to structure your interest and terms. Generally speaking, higher credit scores are associated with lower interest rates, meaning you pay less overall.

How do I check my credit score?

If you’re planning to buy a car on finance it’s a good idea to review your credit score first, so you can make sure you’re in the best shape to apply and to help you define what your budget might be. You can use your credit score as a tool to give you an indication of how likely you are to be accepted for a car finance. You can check your score for free on these sites:

Keep in mind that having a low credit score doesn’t mean you can’t get car finance. There are some lenders that specialise in approving loans for borrowers with poor credit.  Additionally, if one company declines your application it doesn’t mean you can’t get credit from another provider. It’s worth remembering that too many hard searches on your file will be detrimental to your credit score. 

How are credit scores calculated?

 

There's currently no common credit scoring system. Many lenders use scores provided by credit reference agencies such as Experian, Equifax and TransUnion, who create a profile of your spending habits and history of making repayments.  Every lender will have its own unique lending criteria and affordability checks and will make an independent decision as to whether they’re willing to lend to you.

 

So, now you know what a credit score is, let's discuss how it is calculated. Your credit score is calculated based on the following three documents:

  • Your Credit Report (sometimes referred to as a credit file)
  • Your application form
  • Any record a lender may have from you as a customer

What is a credit report?

Your credit report will include:

  1. All your credit agreements (such as loans and credit cards, including any held jointly with other people)
  2. Your history of credit repayment (including payments you've missed over the last six years)
  3. Public records (including County Court Judgments and the electoral roll)

Generally, the factors considered in credit scoring calculations are:

  • Your payment history 
  • Your used credit vs. your available credit
  • The length of your credit history
  • The types of accounts
  • The number of accounts you have

Depending on the scoring model used by the credit reference agency, the weight of each factor and the impact it has on your credit score may vary.

Your payment history

  • Lenders will look at how you’ve repaid your credit in the past to assess whether you normally pay your obligations on time. 
  • Your payment history may include credit cards, retail department store accounts, instalment loans, auto loans, student loans, finance company accounts, home equity loans and mortgage loans
  • Credit scoring models generally look at how late your payments were, how much was owed, and how recently and how often you missed a payment
  • Your payment history includes a lot of information so may have a big impact in determining your credit score

Your used credit vs. your available credit

  • This also considers credit utilization, which is the percentage of credit available to a person that is currently being used
  • They want to see that you are responsibly able to use credit and pay it off, regularly
  • Lenders would like to see that your used credit is low compared to your available credit (this is sometimes called your credit utilisation rate)

The length of your credit history

  • Lenders want to know how long different credit accounts have been active. They like to see that you have a history of paying off your credit accounts
  • Longer credit histories are considered less risky, as there is more data to determine payment history

The types of accounts

Lenders will consider the different types of credit accounts you have, including revolving debt (such as credit cards) and instalment loans (such as mortgages, home equity loans, auto loans, student loans and personal loans)

The number of accounts you have

Lenders will look at how many new accounts you have, how many new accounts you have applied for recently, and when the most recent account was opened

What is a ‘good’ Credit Score?

 

There's no 'magic' number when it comes to your score. But generally, the higher the score the less of a risk you seem to the lender. As the three major credit reference agencies (such as Experian, Equifax and TransUnion) have their own scoring system, it’s not possible to say what ‘good’ is definitively. They have however provided their own bands to help you classify their credit scores, so it's best to check their website.

Ready to take the next step towards a car? Apply for car finance.

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