Your credit score affects both your ability to get a car loan as well as the interest rate you will be offered. A good credit score will ensure that you get a car loan approval at a competitive low interest rate. Conversely a poor credit score will result in a higher interest rate or prevent you from gaining a car loan approval at all! As you can see your credit score can significantly affect your financial life. Read on to learn more about credit scores and car loans.

What is your credit score?

Your credit score is a number between 0 and 1200. The higher the number the better your credit score. Every person who has applied for credit has a credit file and therefore a credit score. ‘Credit’ does not just include loans and credit cards. Your credit file includes utilities such as electricity and gas as well as home and mobile phone and internet plans. Your credit score depicts your creditworthiness. Lenders use your credit score to determine the probability that you will repay your loan on time.

Credit scores can be divided into 5 bands based on the level of risk that a negative event, such as a default or court judgement, will be reported on your credit file in the next 12 months. Equifax uses the following credit score bands.

• Excellent 833 - 1200

• Very good 726 - 832

• Good 622 - 725

• Fair 510 - 621

• Poor 0 - 509

What determines your credit score?

Your credit score is determined by your credit history which is made up of a several factors.

1. Previous loans. How much money was borrowed? What kind of lenders where used? Either mainstream lending institutions and banks or payday short term lenders.

2. Total level of debt. What is the amount of money you currently have borrowed? Will this affect your affordability to make another loan repayment?

3. Repayment history. Was each loan and utility bill paid on time? Late payments and defaults reduce your credit score.

4. Number and type of credit enquires. A busy credit file has more than 6 credit enquires within a 3-to-6-month period. Too many enquires will reduce your score and prevent you from obtaining a loan. Even if you do not proceed with a credit enquiry it is still listed on your credit file and will affect your score.

Some individuals’ occasionally get finance and when they do, they are for big ticket items such as a house, car, or camper trailer. Their loan repayments are paid on time using mainstream lenders. This is an example of good credit history. On the other hand, a person with bad credit history will be constantly enquiring or applying for finance. They will be getting small pay day loans to pay for appliances or holidays, living week to week or month to month. To make matter worse there may be late loan repayment history or defaults.

How can I find out my credit score?

There are various companies that you can access your credit file through for free. The easiest way to access your credit file is through an online credit score provider, such as Equifax.

Can I improve my credit score?

Improving your credit score before applying for a car loan can save you thousands of dollars in interest. Even if you need to purchase a car now there will be opportunities to refinance your car loan in the future at a lower interest rate once your credit score improves. Follow these 4 simple steps and your credit file will improve.

• Pay ALL debt and bills on time.

• Avoid pay day lenders – use mainstream lenders.

• Limit credit enquires.

• Fix any mistakes on your credit file.

How does your credit score affect your car loan application?

Having a high credit score indicates to lenders that you are a low risk. This results in a larger number of lenders that will be willing to lend you money. These lenders will offer car finance at a lower, more competitive interest rate. A lower credit score suggests to lenders that there is more risk when lending money to you. Not as many lenders will be interested in loaning you money and those that do will lend at a higher interest rate. There is no universal minimum credit score required to get a car loan, however, credit scores below 400 significantly reduce the amount of lenders available and will often result in a decline for car loan applications.

Lenders take into account your credit score but also apply their own lending criteria when considering a finance application. Each lender is different and depending on your credit score one lender may decline a car loan application whilst another will approve it.

How to get a car loan approval and avoid unnecessary credit enquires?

Apply for a car loan with the right lender to suit your individual circumstances and credit score. This may sound easy, and it is if you are a finance broker who deals with loans and lenders every day. AAA Finance has a team of experienced finance brokers with access to over 40 different lenders. They know how to structure a car loan to ensure a car loan approval at the lowest interest rate possible.

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