When you’re looking to get a car on finance, your credit score plays a big part in your ability to get approved. If you have a low credit score, this may not be the best news. However, it’s not impossible to get a car with a low credit score but there are ways to overcome bad credit to help get you the car finance approval you need and a better finance deal offered. The guide below has been designed to look at why credit scores affect car finance rates and also how to increase your score in the run up to your finance application.
What is a credit check?
A credit check is when a lender looks at your credit file to check your creditworthiness. Your credit file is essentially your financial CV and shows all the evidence you have of borrowing money and your ability to pay it back on time and in full. There are two types of credit check that can be performed on your credit file. A hard search gives lenders a full look at your whole credit report and multiple hard searched in a short space of time can harm your credit score. If you’re searching for the best car finance deals, you should try to stick to soft search applications as they don’t harm your score and won’t show up on your credit report either.
Why do car finance lenders use credit checks?
Credit checks are used by lenders to see what type of borrower you are. It can be hard to find a car finance deal with no credit check as lenders want to know thew likelihood that you’ll pay your finance back on time and in full. From a lenders point of view, it’s all about risk. If you’ve missed payments in the past and don’t have a good track record of making payments on time and in full, you pose more of a risk to lend to. In an ideal world, lenders like to see applicants with a strong history of good financial management and save the best car finance rates for them.
Does car finance harm your credit score?
Having a car on finance can actually help to increase your credit score, as long as you keep on top of your payments and meet any other financial obligations you have. Car finance can only impact your credit score negatively if you make multiple hard searches with different lenders in a short space of time or if you fail to stick to the terms of your finance agreement.
Can you get a car on finance with bad credit?
It can be possible to get a car on finance with a bad credit score as there are specialist lenders who can help. However, improving your credit score in the run up to your car finance application can help to increase the likelihood of being approved and also get you a better rate offered. Some lenders use higher interest rates for people with bad credit to help secure the deal and reflect the level of risk. This is why it’s always worth shopping around for the best deal possible as one lender may be charging you more than you need to pay.
How to improve your credit score:
- Make payments on time and in full. One of the best ways to improve your credit score and prove your credit worthiness is by keeping on top of all your current payments. By making payments on time and in full, you can show evidence that you can handle credit responsibly and help to rebuild your credit score. If you’re struggling to meet payment deadlines, missing payments or late repayments is not the answer, you should always speak with your lender to see how they can help.
- Fix any mistakes on your credit file. Having misinformation on your credit file can be negatively impacting your credit score. When you check your credit report, you should make sure all your information is accurate and up to date. When you apply for car finance, it’s also important that your details match what is recorded on your credit report. If not, lenders may decline you if they are worried it’s a fraudulent application.
- Reduce the amount of debt you have. This may be hard if you’re struggling to make payments, but your credit score also considers how much money you owe out. Having high levels of existing debt can negatively impact your credit score and lenders may be put off as it looks like you can’t handle any more credit. Where possible, you should try to reduce the amount of credit or finance you currently owe before you start applying for finance.
- Use credit little and often. Once you start making new financial habits, it’s good to get into the routine of using credit but only little and often. This helps to show you can use it responsibly and make payments on time and in full each month.