First time car buyers, here’s the most important things you need to consider about financing: your credit score. Banks and lenders refer to a person’s credit score to determine the risk of giving loans.
If you want financing to purchase a vehicle, then you need to know the score required for a car loan and start building it as soon as possible.
What is a credit score?
A credit score is an automated rating based on your current financial status and previous financial transactions. Basically, your credit score reflects how good or bad you are handling your finances.
Your credit score also tells lenders the risk of lending money to you and the likelihood that you’re going to pay off.
Where can you check your credit score?
Credit scores can be acquired from credit bureaus. They are the ones that collect, maintain, and issue credit history data. From this financial information, the credit bureaus will generate a credit report and base your credit score.
Banks and lenders will request for your credit report and score every time you apply for a loan.
Australian Credit Bureaus
Credit providers like utility companies, private lenders, and banks send information to these credit bureaus whenever you open an account or do a credit transaction with them. Any approved and rejected applications, as well as on time and late payments are all reported to the credit bureaus.
From your credit information, each reporting agency will calculate your credit score using their own algorithms. The credit bureaus also consider different factors when generating your credit score. For instance, below are the bases of an Equifax Score:
- Type of Credit Provider
- Type and size of Loan
- Number of Credit enquiries and applications
- Directorship and Proprietorship Information
- Age of Credit Report
- The Pattern of Credit Enquiries over time
- Personal Details
- Default Information on Credit Report
- Court Writs and Default Judgments
- Commercial Address Information
On the other hand, an Experian Credit Score is based on the following:
- Type of Credit Provider
- Type of Loan Product
- Repayment History
- Credit Limits
- Number of Credit Enquiries
- Negative Credit Events.
Based on these factors, you will be given a credit score between 0 and 1000 (Experian and illion) or between 0 and 1200 (Equifax).
Remember that you may have different credit scores for each of the credit bureaus. The higher the credit score you have, the better chance you’ll get approved for a loan.
What is a good credit score to buy a car?
It’s difficult to pinpoint the credit score required for a particular type of loan because most banks and lenders do not disclose this information.
Nevertheless, each credit bureau has benchmarks that you can use as a reference to the likelihood of your car loan approval. Equifax uses the following credit score benchmarks:
Excellent (833 to 1200) – You are considered as an extremely low risk to default on a loan. Getting a car loan approval is easy and you’ll get more loan options.
Very Good (726 to 832) – You are part of the top 40% creditworthy Australians. Most lenders will offer you a car loan.
Good (622 to 725) – You are in good standing and have a better chance of car loan approval with lower interest rates.
Average (510 to 621) – You belong among the 20% to 40% of Australian with negative items on their credit reports. Additional requirements are needed to be approved for a car loan.
Below Average (0 to 509) – You are determined as high risk and will have difficulty in getting car loan approval. Some lenders will consider lending you but with very high-interest rates.
As for Experian Credit Score:
0 to 549 is Below Average.
550 to 624 is Fair.
625 to 699 is Good.
700 to 799 is Very Good.
800 to 1000 is Excellent.
What interest rate to expect with your credit score?
Your credit score and the interest rate you’ll get for a car loan are inversely related. That means the higher credit score you have, the lower interest rate you can expect from banks and lenders.
If you have an excellent credit score, then lenders will most likely offer you the lowest interest rate available.
On the other hand, if you have an average credit score, then you can expect an interest rate that’s 1% to 4% higher than the lowest available rate.
Below average credit scores can expect very high-interest rates, which will be imposed by lenders to offset the high risk of lending money to you.
How to improve your credit score?
If you have an average or below average credit score, which is considered “bad credit”, don’t worry. You can still improve it.
A credit score is not permanent and may still go up if you begin managing your financial health well.
Here are some ways to improve your credit score:
- Avoid making it worse – To improve your credit score, the first thing to do is to not make it worse. Avoid consecutive late payments, defaults, and court judgments. Also, avoid making excessive credit enquiries. All of these will lower your credit score.
- Make timely payments – Do your monthly loan and credit card repayments diligently. If you miss a deadline, pay within the ‘grace period’ (14 days) and it will not be reported in arrears to credit bureaus.
- Apply for new credit accounts – Getting approved for personal loans or credit cards will give a positive impact on your credit score. But make sure not to send out applications in short intervals because it will have an opposite effect. Also, make sure to continue making timely repayments for all your new credits.
- Dispute Incorrect Credit Report Entries – It’s best to regularly check your credit report to make sure that all information are right. If there are any incorrect details, send out a dispute letter to the credit bureau.
Build a Good Credit Score
Now that you know all about credit scores, it’s time to build an excellent credit standing to get a loan approval. Not only will it help you finance your new vehicle but will also give you the lowest interest rate available.
So, go ahead and find out your credit score from each credit bureau and start building them. Sooner or later, your excellent credit score will help you purchase the car that you need at an affordable interest rate.