As we explore all you need to know about credit scores, this article will provide an in-depth explanation of what a credit score is, what it is used for when it comes to financing. Additionally, why it is crucial to know everything on your credit report to maintain it.
Understanding your credit score is vital for many reasons. You may have many questions such as can you get car finance with bad credit? Are credit agencies regulated? A good credit score can result in more favourable offers from lenders, including lower interest rates. However, what qualifies as a good score and how can you improve your own?
What is a Credit Score?
A credit score is a number that evaluates a person’s ability to borrow money based on their credit history and financial behaviour. I.e., how responsible they are in managing credit and repaying debts. It is a numerical figure generally between 0 and 999, with higher scores indicating better creditworthiness.
A credit score is only known in a few countries, such as the UK, Canada, Germany, Japan, Spain, and Australia, with each country having a different scoring system.
Lenders and financial institutions use a credit score to evaluate the risk of lending to someone and determine their credit products’ terms and interest rates. Credit rating agencies determine these scores by considering a range of factors. This includes an individual’s payment history, credit use, length of credit history, and the types of credit they have utilised. Therefore, having a good credit score and understand what credit score is needed to buy a car is crucial.
What are Credit Scores made up of?
The countries that offer a credit rating system have slightly different ways in which they make up the overall score. UK credit agencies’ score differences include the following factors:
Payment History
This aspect is vital in calculating your credit score. It assesses your track record of timely bill and debt payments. Any delays, defaults, or bankruptcies can harm your score.
Length of Credit History
Lenders frequently consider the duration of time you have maintained credit accounts. A lengthier credit history can showcase your capacity to handle credit responsibly.
Credit Utilisation
Low credit utilisation can positively impact your credit score. This ratio is determined by comparing the amount of credit you currently use to your total available credit.
Public Records
Data obtained from public records, including bankruptcies, court judgments, or individual voluntary arrangements, can impact your credit score.
Furthermore, your credit score can be influenced by various other factors. This includes but not limited to being registered on the electoral roll, your current employment status, and your income level. These additional factors can offer lenders valuable information regarding your financial stability and ability to handle credit responsibly.
Credit Score abroad – How do they differ from the UK?
As mentioned in the last section, credit scoring systems commonly differ significantly between the UK and abroad. Although some countries may have credit scoring systems resembling the UK, others might utilise distinct methodologies and factors that impact credit scores.
Various countries employ distinct scoring models to calculate credit scores. For instance, credit scoring models like Experian, Equifax, and TransUnion are predominantly used in the UK, with UK credit agencies’ score differences varying per lender.
Credit Score in the US
In the United States, most lenders utilise the FICO scoring model, with scoring ranging from 300-850. The FICO score the credit score you see is likely to be the same score you would receive from a lender you have submitted an application to.
Whereas, in the UK, the credit score you obtain may vary depending on the credit bureau you use to review your credit report such as Equifax, TransUnion, Experian all offer varied reporting.
Credit Score in the US
In the United States, most lenders utilise the FICO scoring model, with scoring ranging from 300-850. The FICO score the credit score you see is likely to be the same score you would receive from a lender you have submitted an application to.
Whereas, in the UK, the credit score you obtain may vary depending on the credit bureau you use to review your credit report such as Equifax, TransUnion, Experian all offer varied reporting.
Credit Score in Germany
The primary credit referencing agency in Germany is SCHUFA, which operates differently from the primary credit referencing agencies in the UK or the USA.
In Germany, credit scores are calculated uniquely and based on a starting score of 100, the highest possible score. Over time, this score decreases based on the nature of an individual’s credit history. In other words, the better your credit history, the higher your score will be. A score in the 90s is seen as favourable in Germany, indicating that you are a low-risk borrower, which is the opposite from the scoring system in the UK.
Credit Score in France
In France, there is a unique creditworthiness system in place where only negative information such as fraud, missed payments, or bankruptcy declarations are recorded, and no scoring system exists. This data is stored exclusively by the Bank of France and can only be accessed by authorised financial institutions that hold a special license issued by the Bank of France.
Credit Score in France
In France, there is a unique creditworthiness system in place where only negative information such as fraud, missed payments, or bankruptcy declarations are recorded, and no scoring system exists. This data is stored exclusively by the Bank of France and can only be accessed by authorised financial institutions that hold a special license issued by the Bank of France.
What is a good Credit Score?
What credit score is considered good varies as different credit agencies may have other criteria for determining what is a good credit score number. Credit scores usually range from 300 to 999 in the UK, though the scoring systems may differ slightly between credit reference agencies.
Although there is no universal definition of what constitutes a “good” credit score, it typically ranges between 670 and 799. UK credit agencies’ score differences may vary depending on what score ‘good’ falls under.
According to Loqbox, the average UK credit score for Experian is 797, and the average UK credit score for Equifax is 585—this is due to Equifax’s overall score being much higher than Experian’s.
Credit Score Breakdown
Excellent
An excellent credit score simplifies borrowing money and obtaining credit cards. Additionally, it increases the likelihood of securing the most favourable interest rates and higher credit limits, typically around 800 to 850, although this can vary depending on the scoring model.
Good
A good credit score typically falls between 670 and 799, with the exact range varying based on the scoring model. Credit scores within this range suggest a relatively low level of risk to lenders and generally enable individuals to secure favourable loan terms.
Fair
Credit scores from 580 to 669 are often considered fair. You may be offered a slightly higher interest rate if you have a fair credit score and are approved for a credit card.
Poor
Credit scores below 580 are commonly considered poor. People with poor credit scores may need help getting approved for loans. Additionally, they may have to deal with high interest rates and strict terms if they can secure a loan. Nevertheless, individuals can improve their credit scores over time by practising better credit habits and resolving any negative issues on their credit reports. Exploring options such as working with a finance broker for bad credit car finance will open many more lender choices for you as they can access more than the public.
The influence of credit scores on loan approval
Credit scores are of utmost importance in the loan approval process in the UK. This is because they have a significant impact on both the probability of approval and the terms and conditions set by lenders for the loan.
How credit scores impact getting a loan –
- Lenders use your credit score as one of the primary factors to assess your creditworthiness.
- Your credit score determines the interest rate you are eligible for on a loan.
- Your credit score can impact various aspects of your loan, including the loan amount, repayment duration, and co-signer requirements.
Everything you need to know about credit scores.
As we explore all your questions on credit scores, this one-stop guide will resolve all your questions.
How can you improve your credit score?
The process to improve your credit score requires consistency and effort. Not sure how to improve your credit score? You can start by downloading your free credit report to identify your current score and spot any issues affecting it. It is also beneficial to do so, as sometimes errors happen. It is essential to spot any mistakes, such as a missed payment, and raise it before applying for any finance.
Paying your bills on time is crucial in improving your score. You can avoid missing deadlines by setting up direct debits or automatic payments.
Consistently using a credit card for purchases can demonstrate to lenders your ability to handle credit responsibly, so be sure to make timely payments.
Registering your address on the electoral roll can also enhance your credit score. If you’ve recently changed address and left home or university, you may have dropped off. Throughout this period of change, discrepancies in your address during identity verification by a lender or creditor may lead to concerns and have a temporary impact on your credit score. It is crucial to understand that altering your address may impact your credit score. However, these consequences are usually short-lived. Updating all your financial accounts with your new address and promptly registering on the electoral roll at your new address can assist in minimising any adverse effects on your credit score.
Experian provides a quick enhancement to your credit score through their Experian Boost feature. However, it is essential to note that not all credit scores will increase, and not all lenders utilise this Boost feature by linking your debit card and sharing details about your financial management. This includes regular expenses, savings contributions, Council Tax payments, and subscriptions to digital entertainment platforms like Netflix and Spotify. By practising responsible spending and ensuring that your expenses do not exceed your income, you have the potential to receive an immediate boost to your credit score.
Read our blog post for more tips on how to improve your credit score – here.
Can you get car finance with a bad credit score?
It is possible to obtain car financing even with a bad credit score. Albeit it may present more difficulties and potentially entail higher interest rates or stricter terms than individuals with good credit scores.
To increase your chances of being approved for car finance with a bad credit score, you could practice the following steps:
Before you submit your car finance application, it’s crucial to think about ways to enhance your credit score. This could involve settling any existing debts, challenging inaccuracies on your credit report, and ensuring all payments are made promptly. Even minor enhancements to your credit score can impact the interest rate you receive.
Providing a higher initial down payment may counterbalance a poor credit score. Also, having a trusted friend or family member with a strong credit score as a guarantor for the loan could increase your chances of being approved for car finance.
What credit score is needed to buy a car?
A higher credit score can enhance your likelihood of approval for car finance and obtaining better loan terms. Although there is no set credit score needed to buy a car. Conversely, individuals with lower credit scores might encounter elevated interest rates or need to explore different financing options to obtain car loans. Working with a financial broker can broaden opportunities, given their ability to reach a more comprehensive selection of lenders.
Can financing a car improve your credit score?
After you submit your car loan application, the lender will examine your credit history to conduct a thorough review, potentially leading to a minor reduction in your credit score. So, does car finance improve your credit score? As you make timely payments on your car finance, your credit score can gradually increase, showing that you are handling your loan responsibly. However, failing to make payments or defaulting on your car finance can have a detrimental effect on your credit score.
How do credit rating agencies operate?
UK credit agencies are regulated by the Financial Conduct Authority (FCA), per the Financial Services and Markets Act 2000 (FSMA). The FCA is tasked with supervising the behaviour of financial services firms and markets in the UK.
Credit reference agencies must comply with specific standards and regulations outlined in the FSMA regarding handling consumer credit information. These regulations guarantee that credit reference agencies function equitably and openly and comply with data protection legislation. This includes the Data Protection Act 2018 and the General Data Protection Regulation (GDPR).
Equifax Credit Score
As a prominent credit reporting agency, Equifax plays a crucial role in credit score calculation. Equifax credit score is not directly provided to individuals. Instead, it supplies lenders with valuable information, which they utilise to calculate credit scores using their unique algorithms or third-party scoring models like FICO.
TransUnion Credit Score
TransUnion, along with Equifax and Experian, is recognised as a prominent credit reporting agency. Like other credit agencies, TransUnion credit score reports are offered to both lenders and consumers.
Experian Credit Score
Experian, a prominent credit reporting agency, offers credit reports and credit scores to lenders and consumers. Just like TransUnion and Equifax, Experian credit scores are determined by analysing the data present in your credit report.
Our top most asked questions on Credit Scores | FAQs
Q. How long does information stay on a credit report?
A. The length of time that information remains on your credit report in the UK depends on the type of information on it. Defaults can vary again depending on what the defaulted payment was from.
Good credit habits, like making timely payments, maintaining healthy accounts, and keeping a low credit utilisation rate, may stay on your credit report for a long time, usually between seven to ten years. Bankruptcy or foreclosures can impact your credit report for a maximum of seven years due to adverse credit habits.
Q. How long would it take to rebuild your credit?
A. There is no exact time frame for rebuilding a poor or fair credit score. This is due to several factors that could lower your score, each with its own recovery time.
For instance, if you have a default, it can take up to 6 years to remove it from your score to see an increase in your credit rating. Maximising your credit card could take up to 3 months to rebuild the credit.
Q. What should you look for in your credit report?
A. It’s important to carefully review your credit report to ensure accuracy and monitor your financial health effectively. You should look for a few key things during this process, such as personal information, credit accounts, payment history, public records, electoral roll, and any errors.
