If you’re looking to apply for a car finance agreement, you’ve probably already learned that your credit score has a huge part to play - this is because a finance agreement involved being approved for credit, therefore meaning you will need to be assessed based on your credit score. If you have a good credit score, you’ll be more likely to find deals that offer great value, but for those who struggle with poor credit, it’s often a different story.
Bad credit can be caused by a whole host of different factors, but the impact tends to remain the same - it’s harder to gain approval for credit and the deals you are eligible for tend to have higher interest rates as lenders and brokers look to minimise the risk on their side of the agreement. Given the immense importance placed upon your credit score in car finance applications, it’s probably a good idea to get to grips with what a credit score is and how you can influence it - to help you with this, the team here at ChooseMyCar have put together a comprehensive guide to credit scores to help steer you in the right direction, so read on to learn more!
What is a credit score?
So, first of all, let's look at what a credit score actually is. Essentially, a credit score is a number that determines your creditworthiness in the eyes of the lender - an applicant who is deemed more creditworthy is likely to be able to gain access to better credit and finance deals than those who have bad credit. This is because the individual will be deemed less of a ‘risk’ to lend to; you will likely be deemed higher risk if you have a history of financial troubles such as missing payments on owed debts, defaults, or other factors such as being handed a CCJ and being under a debt management plan. Your credit score therefore plays a key role in influencing a lender’s decision to offer credit when you apply, so it’s vital that you’re keeping your credit profile in top shape to the best of your ability. In general, you’ll find that your credit score is based on the FICO scoring system - there are other scoring systems that are used, but in general it will be based upon this system as this is the one used by most major financial institutions. In the UK, a credit check will usually be conducted with one of three major credit reporting agencies: TransUnion, Equifax, or Experian.
How is it calculated?
Your credit score is calculated based upon a range of different factors and each different credit reporting agency tends to give different weight to certain factors within their calculations - this means that your score may be different with each agent. This is completely normal and you shouldn’t panic; it’s also worth noting that there are different scoring tiers used, so the same number score could mean something different according to each credit checker.
To calculate your score, the credit reporting agency, or CRA, will look at a wide range of information, including but not limited to all of the following:
- The number of open accounts you have associated with yourself
- The total level of debt that you have associated with yourself across all of your open accounts
- Your repayment history, including missed payments, late payments, defaults, and current arrears
The three major credit reporting agencies will use this information, along with many more factors to determine and maintain an accurate rating of your creditworthiness on a constant basis - this means all of your current financial actions will also be being considered and monitored to accurately determine your score. By looking at your payment history, the total amount owed, the length of your credit history, the types of credit that you utilise, and any new credit that you have applied for, the CRA will be able to get a detailed insight into your behaviour surrounding credit.
According to the FICO scoring system, each factor carries approximately the following weight:
- Payment history: this looks at whether you are paying your obligated debts on time and accounts for approximately 35% of your overall score.
- Total amount owed: this looks at the percentage of available credit that you are currently using, which can also be known as credit utilisation and accounts for around 30% of the score.
- Length of credit history: this looks at how long you have been utilising credit for, with longer credit usually being considered less risky as there is more data to look into when calculating your score. This accounts for around 15% of the final score according to FICO.
- Type of credit used: there are different types of credit that can be utilised, and this part of the credit score investigates how you use each of these. ‘Instalment credit’, such as car finance loans or mortgages, is one type of credit, with the other being ‘revolving credit’, which is credit in forms such as credit cards where the utilisation is constant. This evaluation makes up about 10% of your credit score.
- New credit: This section of your credit score is dedicated to looking at any new credit agreements that have been put in place, including new accounts, how many new accounts have recently opened, and how many new accounts have been applied for. This makes up the remaining 10% of the score.
By looking at the above, you should now have a better understanding of the factors that are considered when calculating your credit score, but if you want to find out how this could impact your applications for car finance, why not take a look at our car finance calculator?
How can I check my score?
Checking your credit score has never been easier than it is right now - with the rise of online tools and applications now helping you to track and manage your credit score, it’s become incredibly easy to access your credit score and investigate the factors that are having a negative impact on it. There are lots of different platforms that you can use and each has its own unique features to make use of - please be aware that whilst some of these applications offer a paid service for deeper insight and help with improving your score, everybody has a right to access their credit score for free, so you can never be forced to pay for a credit score service to view your score. These paid services are simply an add-on to help you gain a better understanding of your credit score, rather than a cost for accessing the score itself.
No matter which platform you choose to use, it’s likely that your score will have been calculated using one of the three main CRA’s, so don’t worry - using a different service won’t impact how accurate your score is. You can try out a few different services until you find the one that you feel most comfortable with, as many of the credit rating apps do tend to have specific features that you might not be able to find on other services.
What makes a good rating?
When asking this question, most people expect to be able to find a concrete number that classifies as a ‘good score’. Unfortunately, this isn’t really the case and there are many different factors that will decipher how ‘good’ a credit score is. As we’ve mentioned before, different credit reference agencies use slightly different methods for calculating and categorising scores, so it would be messy and inaccurate to try to use a one-size-fits-all approach when trying to decide what makes a ‘good’ score. In general, your score will range from poor all the way through to excellent, with some CRA’s placing you in different brackets due to their differing criteria and scoring. If you find that your score is consistently coming out with low numbers and ‘poor’ ratings, it could be time to look into improving your credit score - there isn’t an exact science to this and the ways to improve will likely vary from person to person, however there are a few basic things that you can do in order to start building your credit score up towards a ‘good’ or ‘excellent’ rating. Check out our tips for improving your credit score below - some of them might be far more simple than you’d have imagined!
How do you improve your score?
Improving your credit score can be done in a variety of ways and will be dependent on where your current strengths and weaknesses lie in terms of your credit history. If you are struggling to improve your credit score, here are a few things to try and a few tips on how you can maintain a higher score once you reach that level.
Tips for improving your credit score:
- Register on the electoral roll at your home address. This is an incredibly easy step to take that a surprising amount of people forget to do. Being on the electoral roll helps companies to confirm your identity, which reduces the chance of fraud and in turn, the risk associated with offering you credit! In turn, your creditworthiness could improve as a result of simply adding yourself to the electoral register at your home.
- Keep up with your payments. If you’re currently utilising credit (which is a good thing, as we’ll discuss later), you’ll want to make sure that you’re paying back your debt on time and in full each and every month. By doing this, you keep your debt at a minimum and prove to lenders that you are a reliable, responsible and trustworthy recipient of credit that there would be little risk with in the future.
- Keep your credit utilisation low, but never at zero. Utilising credit is the only way to prove that you are responsible when using credit, so be sure to use a small amount of your credit regularly and keep up your finance repayments - by creating a perfect history of successful repayments, you again show yourself to be a safe bet to any potential lender, broker, or finance company that you may deal with in the future for things such as mortgages and car finance plans.
Tips for maintaining a good score when you get there:
- Keep an eye out for fraud, as any fraudulent activity on your account could badly harm your score. To avoid this, you’ll want to be very careful with how you use your credit cards and other forms of credit, as well as monitoring your credit report for any suspicious or unfamiliar activity that wasn’t committed by yourself.
- Borrow what you can comfortably afford and no more. Borrowing more than you can afford can be a slippery slope that leads to large amounts of debt, a CCJ (County Court Judgement) , debt management plans, or even bankruptcy, so it’s best to only borrow if you can guarantee that you’ll be able to comfortably repay the debt on time. If you do ever miss a monthly repayment, it’s vital that you contact your lender immediately to work out a plan for repaying this extra debt.
- If an account isn’t being used, close it! When you’ve got multiple open accounts, your available credit amount will be higher and this can mean lenders will be apprehensive to offer you any more. Keep on top of your open accounts and close any that you don’t think are of use anymore so that they can’t cause any problems by interfering with your active accounts.
- Keep up with payments. This one is simple - make your payments on time and in full every month, or risk major harm being done to your credit score in the long run.
- Finally, you’ll want to limit the amount of new credit applications that you’re making once you have a healthy score - too many applications in a short period of time can indicate an over-reliance on credit, which is a huge red flag for lenders. Every application will appear on your credit report, which can be seen by all future lenders, so be careful with how often you apply for new credit.
What can negatively impact your score?
In most circumstances, maintaining a healthy credit score comes down to acting responsibly in relation to the credit that you have been afforded - if you handle this credit well, you’ll see your score rise, but if you have trouble managing this credit, your score could plummet. See the list below to find the common pitfalls that can lead to a bad credit score:
- Late payments
- A limited credit history, or poor credit history
- Too much new credit
- Too many recent inquiries for new credit
- Too many active accounts
- A high credit utilisation
- Excessive arrears
- Public records such as a CCJ or bankruptcy
Does car finance impact your credit score?
Yes, car finance will impact your credit score. Car finance deals are a major payment each month, which makes them a huge factor in your credit score - don’t be alarmed, this may sound daunting but it can actually be a very useful tool for improving your credit score if you are responsible and rigid with your payments. If you keep your applications to a minimum, or better yet use a pre-approval system such as ChooseMyCar, the initial application shouldn’t harm your credit score at all; applications will only negatively impact your rating if there is evidence of multiple searches in a short space of time. This is where our bad credit finance deals become an incredibly useful tool. When you have a poor credit score, you can’t afford to have multiple searches happening on your account, and you certainly can’t afford a rejected loan application to appear on their either - our pre-approval system allows us to check whether you may be eligible for one of our deals using a soft credit check, which doesn’t appear on your credit report. If this initial check comes back clear, you’ll be able to submit to a hard credit check with the safety and knowledge that you are more likely to be accepted for credit.
The instance where credit can impact your score is when you start making, or failing to make, your payments. Missed or late payments will always harm your credit score, and evidence of these actions can actually stick around for quite a long time, so if you want to avoid long term harm being done to your credit score, you’ll want to make sure every payment goes through smoothly.
Car finance for those who have bad credit
We know that your individual circumstances can change in an instant and that, for one reason or another, some people may find themselves struggling to be able to gain approval to credit that will enable them to get a safe, reliable car to help them with their daily activity. That’s why we work hard to be able to offer the best bad credit car finance deals to our customers, using a flexible payment structure that can be tailored to the length, amount, and level of deposit that best suits you. To help you avoid multiple hard searches or rejected applications appearing on your credit report, we’ll use a 2 step credit check method that uses an initial soft search to offer a pre-approval status - this can be done online in a matter of minutes so you can get your application started as soon as possible!
Please be aware that a soft search is not as comprehensive or detailed as a hard search, which can sometimes mean that an initial approval in the soft search does not always guarantee approval after the hard search. If you want to learn more about bad credit car finance and the service that’s offered here at ChooseMyCar, just read on - we’ve put together all of the most important information right here on this page!
Will I be able to get a car finance agreement if I have bad credit?
In most cases, yes! At ChooseMyCar we’re specialists in bad credit car finance, so we’ve got lots of different types of finance to help those with bad credit, such as through utilising no credit check car finance, so you won’t have to worry about not being able to find finance - there’s something for everyone. Our car finance deals are designed to put you in the driving seat, both figuratively and literally, allowing you to structure the payment plan to suit your exact needs so that you can get out on the road in your shiny new car in no time at all. When you’re applying for a car finance deal at ChooseMyCar, you can set the length of the finance agreement and the amount you’d like to put down as a deposit using out handy tools - this will then show you how much you will be expected to pay each month so there’s no ugly surprises at the end of the application process - if you want to use our finance calculator, just click here!
If, once you’ve used our car finance calculator, everything looks to be affordable in line with your monthly income, all you need to do is continue with your application process either by phone or online. Our friendly team is always on hand to help out if you hit any roadblocks, so don’t be afraid to get in touch if you’re having any trouble with your application or if you’d just like to ask a few questions before you proceed. Once your application is complete, you’ll be able to finalise the agreement with the broker or lender, set the monthly payment plan rolling, and get your hands on the keys to your new vehicle in next to no time at all.
From convenient hatchbacks and multi-purpose vehicles to flashy sports cars and elegant coupes, our extensive range of cars is curated to offer something for everyone. No matter whether you’re looking for an economical car to handle the school run, an SUV for rugged terrain in all weathers, or a convertible to make the most of those glorious days filled with sunshine, you’re sure to find something that suits you within our fantastic network of trusted UK dealerships. Browse our range today to start your journey towards getting back on the road with the perfect car, at the perfect price.
The car finance options we have available for people with a bad credit score
So, we have explained, in exhaustive detail, the topic of credit scores. Now, with that information established, let's look at the next step, which involves examining the kind of finance options available for people that have poor credit ratings. Here at ChooseMyCar, we have a range of car finance options that are sure to get you your dream car. In this section, we're going to detail the main three bad credit car finance options available which are Hire Purchase (HP), Personal Contract Purchase (PCP), and Guarantor Car Finance. We do have other options such as Personal Contract Hire, and Personal Loans, but the aforementioned three are the most popular with young drivers, or people with bad credit history. So, without further ado, let's go ahead and break down each of these readily available finance options.
Hire Purchase (HP)
The first one we're looking at is HP. Now, with this option, the clue to what it is about, is sort of in the name - Hire Purchase. It is a car finance payment option, for people with a bad credit rating, that focuses on pre-agreed monthly payments, over a chosen period (usually between 12-60 months), and, at the end of the agreement terms, the person will own the car. This option is extremely popular because there are relatively low risks, and the person applying can change the monthly terms based on personal circumstances, and financial circumstances. Of course, the longer the payments, the more interest is paid but as long as there is a strong budget in place, an HP deal can be very cost-effective.
Personal Contract Purchase (PCP)
Second is the Personal Contract Purchase, this is very similar to a HP with one key difference, unlike an HP, there is no assumption of ownership after the monthly payments have finished. However, at the start of the deal, a final balloon payment can be agreed upon. This balloon payment is paid in the final month of the deal and means the person will own the car at the end of it. In addition, a PCP also allows you to select the level of deposit contribution that is paid. Paying back monthly payments, over a period of time, also allows you to build up your credit score and improve your poor credit profile.
Guarantor Car Finance
As well as being popular with people who have a bad credit profile, Guarantor Car Finance is one of the most selected forms of finance for young drivers. This type of finance involves a third party, who is usually a family member, as well as a lender and an applicant. The third party will be called upon to act as a guarantor if the person applying is unable to pay. This kind of finance is a great way of allowing young people to not only drive away in their first car, but also begin to advance their credit file.
Why you should choose a used car if you have a bad credit score
Marrying up why you should opt for a used car if you have a bad credit score may seem immediately obvious, but, in fact, there are lots of reasons why a car that has been previously owned is more beneficial than one that has rolled off the production line. The first benefit is to do with volume, there are millions of used cars out there and this supply has had the effect of reducing costs and, because there are so many vehicles available, the variety is endless meaning you're bound to find one that is right for you.
The second reason relates to cost. After a few owners, depreciation levels in a used car even out and, therefore, it is not as big a factor as when the car was new. This levelling out means that monthly costs remain at an affordable rate because lenders aren't as worried about the car dropping drastically in value. Low costs across the board open up options for people with less than outstanding credit.
Bad credit car finance, while being less than an ideal, does give you some control, because you're able to budget, and work out what monthly payments work for you. Also, larger initial deposits can reduce payments, saving you money in the long run. Budgeting, as we mentioned, is key. There are so many used cars available that lenders are much more open to you setting a price that works for you and working to find a car that fits a particular budget.
The deposit, and monthly cost, of a new car, is far, far higher, simply because there are fewer newer cars. If you do opt for a new car, you have to be sure you can afford the massive monthly payments and, in any case, the chances of being approved for new car finance, with bad credit, is pretty unlikely.
We passionately believe that used cars are, in many ways, better than new vehicles. There are dozens and dozens of cars on our site from reputable manufacturers such as Renault, Volkswagen, and Toyota, that have all the additional features of their new counterparts. Be it sunroofs, sat-navs, Bluetooth connectivity, or heated seats, there are plenty of features that not only appear in many used cars but, very often, come as part of the price, with no extra costs. This leads us on to our final reason why you should opt for used cars if you have a bad credit score, and that is value for money. Whether your budget is £5000 for a city car, hatchback or other smaller car, £10,000 for something more family-friendly, or £20,000 or less for a stylish coupe, or sports car, you're going to get a lot of car for your money. All you need is a bit of patience, a clearly defined monthly budget, and an ounce of research and, in time, you'll soon find the ideal car for you, your allowance, and your needs.
Our team here at ChooseMyCar have years of collective experience in the used car market and would be more than happy to help you through what can be, at times, a confusing process. Be sure to get in touch with us and we'll be more than happy to help.