Guide
Credit ratings explained
What is a credit rating and how does it affect the type of car you could buy? Let's dig into it.
Words by: Andrew Woodhouse
Published on 5 December 2024 | 0 min read
Your credit rating is one of the most important factors when applying for car finance in the UK.
Your credit rating, also called your credit score, reflects your financial history and helps lenders assess the level of risk involved in lending to you. Here's a breakdown of how credit ratings work and the impact they can have on car finance applications.
Your credit rating, also called your credit score, reflects your financial history and helps lenders assess the level of risk involved in lending to you. Here's a breakdown of how credit ratings work and the impact they can have on car finance applications.
What is a credit rating?
A credit rating, also known as a credit score, is a three-digit number that represents your borrowing history. The higher the score, the more likely you are to be classed as “credit worthy” and approved for finance.
This score is calculated by credit reference agencies like Experian, Equifax, and TransUnion. The score is based on a few factors: Payment history: Are you paying bills, loans, and credit cards on time? Credit utilization: How much of your available credit you’re using. Credit history length: The age of your credit accounts. Public records: Bankruptcies or County Court Judgments (CCJs). Credit scores typically range from 300–999, with higher scores indicating lower risk to lenders.
This score is calculated by credit reference agencies like Experian, Equifax, and TransUnion. The score is based on a few factors: Payment history: Are you paying bills, loans, and credit cards on time? Credit utilization: How much of your available credit you’re using. Credit history length: The age of your credit accounts. Public records: Bankruptcies or County Court Judgments (CCJs). Credit scores typically range from 300–999, with higher scores indicating lower risk to lenders.
Why does your credit rating matter in car finance?
Car finance agreements often involve borrowing a significant amount over several years, so lenders want to be sure you’ll be able to keep up with payments.
A credit rating is a fairly universal way of assessing a lot of people by the same criteria, though each credit reference agency will have their own way of gathering your information and calculating your score. Lenders will use your credit rating to determine: Your approval chances: A good or excellent score makes it easier to get approved. Poor scores may lead to rejection or require a guarantor. Your interest rates: With a high credit score, you’re more likely to access lower interest rates, reducing the overall cost of your finance agreement. On the other hand, poor scores result in higher interest rates. Any deposit requirements: A strong credit profile may allow you to pay little or no deposit. Those with weaker credit may need to put down a larger upfront payment.
A credit rating is a fairly universal way of assessing a lot of people by the same criteria, though each credit reference agency will have their own way of gathering your information and calculating your score. Lenders will use your credit rating to determine: Your approval chances: A good or excellent score makes it easier to get approved. Poor scores may lead to rejection or require a guarantor. Your interest rates: With a high credit score, you’re more likely to access lower interest rates, reducing the overall cost of your finance agreement. On the other hand, poor scores result in higher interest rates. Any deposit requirements: A strong credit profile may allow you to pay little or no deposit. Those with weaker credit may need to put down a larger upfront payment.
Credit ratings and types of car finance
Hire Purchase (HP) and Personal Contract Purchase (PCP): Lenders assess your creditworthiness f to determine if your application is approved, and also to determine the interest rate they can offer.
Personal loans: These are often unsecured, so a good credit score is crucial for approval. Bad credit car finance: If you have a low score, specialist lenders may offer deals tailored for your situation, though these usually come with higher costs. Learn more about getting car finance with bad credit. Leasing: You'll also need a good credit rating to be eligible for a car lease.
Personal loans: These are often unsecured, so a good credit score is crucial for approval. Bad credit car finance: If you have a low score, specialist lenders may offer deals tailored for your situation, though these usually come with higher costs. Learn more about getting car finance with bad credit. Leasing: You'll also need a good credit rating to be eligible for a car lease.
How to improve your credit rating before applying
There are a few ways to improve your credit rating and secure a better deal when buying a car on finance. These include:
• Check your credit report for errors and correct inaccuracies. • Pay bills on time to boost your score. • Aim to use less than 30% of your available credit. • Avoid multiple credit applications, as too many hard checks can lower your score.
• Check your credit report for errors and correct inaccuracies. • Pay bills on time to boost your score. • Aim to use less than 30% of your available credit. • Avoid multiple credit applications, as too many hard checks can lower your score.
For more information on how to buy a car on finance with a bad credit score, read our free guide here.
For free, impartial financial advice visit Citizen’s Advice and MoneyHelper. For more guides on car finance and the latest deals, visit Auto Trader’s finance hub.
For free, impartial financial advice visit Citizen’s Advice and MoneyHelper. For more guides on car finance and the latest deals, visit Auto Trader’s finance hub.