Your credit score, or credit rating, is a snapshot of your credit history in number form. Lenders look at your credit score to help them decide whether to offer you credit. Credit scores range from 300 to 850. The higher the number, the better your credit score – and the healthier your credit history. If you have a low credit score, you may still be able to access an unsecured personal loan (UPL), or another kind of car finance, but you can expect to pay a higher rate of interest than someone with a high credit rating.
You can check your credit score for free at any time via one of the three official credit rating agencies (CRAs): Equifax, TransUnion or Experian. Each CRA has slightly different credit reporting rules, so you will see a different number depending on which one you use.
Factors that help to build a strong credit score include:
Being on the electoral roll.
Having some open, manageable credit, in the form of credit cards, mortgage or other bills on your credit file.
Paying your bills on time. This is more important than everything else. A solid history of making your monthly payments on-time and in full will ensure your credit report stays in good health.
Factors that can bring your credit score down include:
Gaps in payment history. Any missed payments or loan defaults will appear on your credit file and could pull your score right down.
Applying for too many loans or other forms of credit in a short space of time. Each application will leave an imprint on your credit file and too many, too close together will signal to potential lenders that you could be an unreliable customer.
Not having any credit history at all. Many lenders are wary of lending to young people because their lack of credit history makes them an unknown quantity.
Finance providers use your credit score and credit history to work out whether to lend you finance and how to structure your terms and interest payments. In most cases, higher credit scores are rewarded with lower interest rates and the best payment terms, so it’s really important that you keep your credit score as healthy as you can.
Lenders use credit scores to work out your credit risk – in other words, how reliable you are likely to be at making your loan repayments. These scores are calculated by looking at the information on your credit report. If you have a good credit history with evidence of loans and other forms of credit, all paid off on time with no missed payments, then you are likely to have a much higher credit score than someone who was unable to make their loan repayments. The higher your credit score, the lower risk you represent to lenders and the greater chance you have of being offered a loan with favourable rates.
While there is no set-in-stone official minimum credit score for a UPL, scores of between 650 and 750 are generally seen as good, with 750 and above being excellent. People with a credit score of 550 or below may struggle to access credit with a reasonable interest rate. And if you have a very low or non-existent credit score, you will find it difficult to access a personal loan at all.
Providers of unsecured personal loans usually only offer them to those with the best credit ratings. This is because with no guarantee – or asset – attached to a car loan, it represents a greater risk to the lender if the customer defaults on the loan. Ultimately, lenders will base their decision on what’s in your credit report, not just on the score itself.
With a secured loan – or another type of car finance such as hire purchase or PCP, for example – the lender can recover the asset (the car, in the case of car finance) if the borrower is unable to make all the repayments. Because of this guarantee, the lender may feel more comfortable offering these finance deals to someone with a less-than-perfect credit rating.
Find out more about the differences between these various types of loans in our guide: Banking choices: the difference between secured and unsecured loans.
Most of the time the rule of thumb is this: the better your credit score, the better the chances you have of being offered credit and the more favourable terms you will be able to access.
Although some lenders will be wary of lending to you if you have a low credit score, there are lenders who specialise in credit for those with very little or very poor credit history. You are unlikely to qualify for an unsecured personal loan however, and you can expect to pay a relatively high rate of interest, and to pay more overall.
Other personal loan requirements
Personal loans tend to be quicker to arrange than other types of car finance. You can apply for a car loan from various finance providers, including banks and building societies, car dealers and specialist online lenders like Oodle.
Every lender and every loan will have slightly different criteria and requirements. Make sure you are aware of what these are before you make a full application for any loan.
To qualify, you will need to be at least 18 years old and undergo a credit check, an affordability check and an identity check.
Although there are no overnight fixes, if your credit score needs a boost, there are things you can do to make that happen. Here are our top tips.
Pay off any existing outstanding debts as best you can.
Make sure you have at least one form of credit (a mobile phone contract, for example) in your name and that you pay it off on time every month.
Set up direct debits or standing orders for any regular bills (phone, rent, utility bills etc) to ensure you never miss a payment.
Give your spending habits an overhaul and cut back on any unnecessary expenses.
Review your credit reports regularly and report any errors directly to the credit agency – they are obliged to fix them.
Understanding credit scores and how they impact your ability to get car finance is an essential part of managing your finances. Building good financial habits today will open up your financial opportunities long into the future.
You can find out more in our related guides:
Will a car loan hurt my credit score?
