Guide Bad credit and car finance

A bad credit score can make it harder for you to secure car finance agreements, but it doesn’t prevent you entirely.

Here, we look at your car finance options if you have a lower credit score. So, first up: what is a credit score?

Jump to:
• Credit basics
• Bad credit car finance options
• Improving your credit score
• Jargon buster and FAQs

A credit score is a three-digit number that represents your borrowing history.

Your personal credit score is ordinarily calculated using your credit report. It considers any credit account payments you’ve made, credit searches you’ve undertaken, your total debts and credit availability, and public records such as your information on the electoral roll.

Keeping your credit information tidy and under your control, and paying credit debts back in full and on time, can help you get a higher credit score.

Credit score and credit rating are sometimes used interchangeably, but they are slightly different. A credit rating refers to a variety of systems and scores used to assess a consumer’s creditworthiness.

A credit report is a record of your personal history when it comes to borrowing. It looks at your personal finances and credit history from several sources including any credit cards, bank payments, direct debits and debts you may already have including mortgages or existing finance payments.

It will also include electoral roll information and any public records, such as County Court Judgements and insolvencies.
Your credit report will be used by car finance providers, alongside your application form, to see if you meet their criteria for lending.

Your credit score is used by lenders – including car finance providers – to gauge how likely it is you’ll be able to make any repayments you owe.

As such, people with a higher credit score are often more likely to be accepted for finance applications. Those with high credit scores can sometimes access better deals with lower interest rates, or even 0% car finance deals.

You can get a free copy of your statutory credit report and credit score from any of the three main credit references agencies: Experian, Equifax or TransUnion.

All three agencies will have the same records, but they use different formulas to calculate your credit score. As such, your score may be slightly different depending on who you go to.

Generally, you could be considered a sub-prime borrower if you have a credit score of less than 500. Sub-prime borrowers are more likely to be rejected or face higher interest rates.

Keep in mind that lenders will look at your credit report, your application form, and any business they’ve done with you in the past before they decide. There isn’t a credit blacklist or set credit rating that’s guaranteed rejection or acceptance, and different lenders may come to different decisions.

Some lenders may refuse you if your credit score is very low, while others may offer you car finance but with higher interest rates – it’s at the discretion of the lender.

If you are offered a deal with higher interest rates, make sure you look at your budget again. If your interest rates are higher, your total monthly payments will be too.

You need to make sure you can afford the monthly payments – failure to do so can make your credit score drop further and could even result in further action to recover the vehicle, including repossession.

As such, your choice of vehicle may be limited to lower value cars. Don’t stretch for a more expensive car if you can’t afford it every month.

If you are struggling to make payments to your priority bills (mortgage, rent, council tax and utilities) or any other creditors (loans, credit cards, catalogues etc) then free, confidential advice can be found by contacting the Citizens Advice Bureau or visiting the Money Advice Service.

First up, check your application form. Filling it in wrong (anything from writing £100,000 when you meant to put £10,000 or a simple spelling mistake) could result in your being rejected. Also make sure you have enough supporting documents, such as proof of address and employment.

You should also check your personal credit report for any errors, as fixing these could improve your score and your chances of approval.

Every car finance lender has a different criterion, so being rejected from one doesn’t mean you’ll be rejected from them all. Just be aware that if you’re refused car finance multiple times in a short window, this could show up on your credit report and affect your credit score.

Remember: you could be refused for car finance if you have a bad credit rating, or if you don’t have much credit history (for example, you’ve never owned a credit card). In both instances, you can improve your chances by improving your credit score.

If you are refused car finance or have decided to wait and get a better deal with a lower interest rate, then you can improve your credit score and try again.

Any differences between the information on your application form and your credit report could lead to rejection, so make sure they match up: ideally before you make an application.

If you find you’ve been the victim of fraud, make sure the credit reference agencies add a notice of correction to your file, which will show it wasn’t you.

If you don’t have any credit history, it’s hard for a lender to see if you’ll pay them back on time. Take the time to look at options, such as low interest credit cards, that are suitable for you – just read the terms and conditions every time.

Applying for credit creates a hard inquiry on your report, and too many hard inquiries in a short space of time can bring your credit score down. This effect will fade over time, but it’s best just to open credit you need and can pay off – nothing more.

Improving your credit score is a balancing act – you need just enough to show you can pay off your debts.

It can be tempting to close old credit cards down, but an old account that’s been paid off every month can look good on your report. Furthermore, closing an account can increase your credit utilisation ratio (see jargon buster below).

Just be aware that having a large overall credit limit, that you’re not fully utilising, can be seen as a negative by some lenders so you need to find a balance that shows you can manage and pay off debts.

As your credit report is includes a history of how well you pay debts back, paying bills on time (including everything from rent to phone bills) could put you in a favourable light to potential lenders.

Consider setting up direct debits if you can or set reminders of when payments are due.

If you can regularly make small payments on your credit card and pay them off by the end of the month, you should be able to boost your score and show you can reliably pay money back.

If you’re not on the electoral register, you’ll struggle to be approved. If you’re worried about privacy, you can remove yourself from the open register, which will stop third parties being able to buy your data.

If you’ve had any joint accounts over the last six years, these will show on your credit report through ‘financial association’.
Just remember that if you close an account with a negative balance and don’t pay it off, this could end up with a collection agency. If it does, this could negatively impact your score.

Missed payments will show on your credit report for three years. Bankruptcy, defaults or County Court Judgements (CCJs) will show for at least six years.

Other insolvencies can include Individual Voluntary Arrangements and Debt Relief Orders in England, Wales and Northern Ireland, and Sequestration and Trust Deeds in Scotland.

After this, they should be removed from your credit history – but it’s not always automatic so check with all three agencies this has been done.

This is how much you currently owe, divided by your credit limit. So, if you have £1,000 available on a credit card and owe £250, you have a credit utilisation ratio of 25%.

This is a court order telling you to pay money you owe in debts. CCJs are normally issued in England, Wales and Northern Ireland. If you receive a CCJ, you have two weeks to respond.

For more information on CCJs, please visit the Money Advice Service.

A default is when you are deemed to have broken the terms of your credit agreement, and your creditor (lender) cancels your agreement with them.

If you miss payments, or don’t repay the correct amount, your creditor may send you a default notice – which serves as a warning to make the full repayment.

If you fail to do so, the default may be applied. You can only default on a debt once, but further action can be taken after – for example your debt could be sent to a debt collection agency who will contact you on the lender’s behalf.

Defaulting can significantly reduce your overall credit score.

Missed payments, default, bankruptcy or County Court Judgements (CCJs) can have a serious impact on your credit score.

Shorter-term, your score may be brought down by too many applications for credit or opening new lines of credit.

Credit scoring isn’t uniform though, so missing one payment isn’t likely to have a massive impact if your overall credit history is great. If your overall history is poor, it can have more of an impact.

You may have filled in your application form incorrectly.

It may just be the case that you don’t meet the lender’s criteria, in which case try and get pre-approved by another lender. Just be aware too many hard checks in a short space of time can negatively affect your credit score.

When you apply for credit, such as car finance, the lender will check your credit report to see if you’re eligible for their criteria.

If the lender reviews your credit report before approving you, this is a hard credit check and will show on your credit report. Too many hard checks in a short space of time can bring your credit score down.

If you check your own credit score, or the lender checks your credit to pre-approve you, this is a soft check and does not impact your credit score.

You can get car finance if you’re on benefits, though you may find it harder to be approved in some instances.

You don’t necessarily have to get bad credit car finance; you just need to be able to make the monthly payments and prove it with relevant documents like bank statements and proof of income.

You can get car finance if you’re unemployed. As with applicants on benefits, you need to budget properly and make sure you can afford the car every month. Then, you need to prove this in your application.

For more information on managing your credit, please refer to the Money Advice Service.

The main credit rating agencies also offer guidance and more information:
Experian.
Equifax.
TransUnion.