Credit Scores: A Guide for Dealers and Their Customers

A quick-guide to help customers understand credit assessments and their impact on car finance.

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Credit checks play a vital role in helping companies understand your financial behaviour and eligibility for various services. Whether you are applying for a car loan, seeking a rental agreement, or even considering a mobile phone contract, companies often rely on credit checks to evaluate your creditworthiness. 
 
Credit checks are conducted by credit reference agencies (also known as CRA’s) such as Experian, Equifax, and TransUnion. The specific calculation method may differ between agencies, but there are common factors they all consider. These factors include the amount you owe, how frequently you apply for credit, and whether you make your payments on time.

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What is a Credit Score

A credit score is a three-digit number that reflects your borrowing history. It is worth noting that each CRA may have slightly different calculations, resulting in a slightly different score. For example, at the time of writing this blog, Experian’s score is out of 999, Equifax is out of 1000, and TransUnion is out of 710. Whilst there is no magic number when it comes to what each lender looks for when assessing your credit worthiness, the CRA’s will tell you whether your score is generally rated as Excellent, Good, Fair, Poor, Very Poor (or similar) so that you can make an informed decision before applying to lending companies. For example, if you had a ‘Fair’ score, you may not want to apply to companies only offering prime (very low) rates of interest.
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What is a Credit Report

Each CRA also produces a report of your personal borrowing history. It looks at personal finances and credit history from companies that you have/have had a financial relationship with. Such companies could include loans for credit cards, bank payments, direct debits (including utility and insurance companies), mortgages and loans. Also included is the electoral (voter’s) roll information, any public records such as County Court Judgements (CCJs), insolvencies such as Individual Voluntary Arrangements (IVAs), and Bankruptcy.
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Soft Credit Checks

Soft credit checks, also known as soft searches, give an initial view of your credit report without leaving a visible record for companies to see. You can perform a soft credit check on your own credit reports or when using services that compare credit options. Soft credit checks do not affect your credit score or affect any future credit applications.
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Hard Credit Checks

Hard credit checks, also known as hard searches, are more thorough examinations of your credit report that create a visible record. These checks can impact your credit score, and if there are multiple inquiries within a short period, it may raise concerns among lenders and affect your creditworthiness. Lenders or companies that offer credit, like loans, credit cards, mortgages, utility services, or mobile phone contracts, typically perform hard credit checks at a certain point of the finance application. To prevent unnecessary harm to your credit profile, many lenders now use a soft credit score at the initial application stage to provide a preliminary decision. If you then proceed with the financial agreement offered to you, a hard search is usually conducted on your credit file and will assist with decisions on any future credit applications that you may make.

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Understanding the Differences Between Searches

How Customers Can Manage Credit Checks

To navigate credit checks effectively and safeguard your creditworthiness, you can consider the following:

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Minimise Hard Credit Checks

• Check to see if the lender providing finance carries out hard or soft searches at the application stage, so that you can make an informed decision on whether to proceed with the application.
• Make credit applications strategically, spacing them out to avoid multiple inquiries within a short time frame.
• Try to apply for eligible credit to increase your chances of approval and minimising unnecessary inquiries.

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Leverage Soft Credit Checks

• Use credit comparison services provided by reputable agencies such as Experian, Equifax, and TransUnion.
• Take advantage of soft credit checks to assess eligibility for credit products without impacting your credit score prior to application.

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Monitor and Protect Your Credit Report

• You should regularly monitor your credit reports for any suspicious activity or errors.
• It is a good idea to consider credit monitoring services that provide real-time alerts about changes to individual credit profiles, as this helps to detect and address potential fraud or identity theft promptly. Experian, Equifax, and TransUnion are examples of three leading agencies that provide this service but before using them, you should look to see if there are any charges and whether you are willing to pay them.

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A Common Concern: A Low Credit Score and Its Impact on Car Finance

Having a lower credit score doesn't necessarily mean you can't get car finance and there are often credit options available to you even if you have a less-than-perfect credit rating.

While some lenders may refuse car finance to individuals with very low credit scores, others may offer motor finance options with higher interest rates and conditional terms, such as a maximum monthly payment. This is often known as subprime lending. Higher interest rates mean higher monthly payments; whilst spreading the cost of payments over a longer term will help lower these repayments, the overall cost of borrowing will be more expensive.

There are also customers whose credit score and credit rating fall outside of prime borrowing. They may have had credit problems in the past, but are currently proving that they are able to manage money and are getting back on track with their finances. This means that they are able to borrow money at a better rate than subprime. This is known as near-prime borrowing and interest rates are somewhere between those given for prime and subprime customers.

Sometimes, whilst the customer has no adverse credit, the credit reporting may be “thin” due to small amounts of credit;, there is little trace, including not being on the electoral roll. Often, this is enough to not qualify for prime rates.

However, keep in mind that each lender assesses creditworthiness for motor finance based on various factors, including your credit report, application form, and past business interactions. As mentioned, there isn't a one-size-fits-all guarantee for acceptance or rejection since different lenders have different criteria.

When borrowing money, it's essential to consider your budget carefully. Failing to make payments on time or payment arrears could further damage your credit score and even lead to repossession of the vehicle on finance. It's important not to overstretch yourself by opting for a more expensive car if it's beyond your monthly affordability. The running costs and general upkeep of the vehicle must be considered in addition to the monthly car finance instalments.

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If You Are Struggling to Make Payments

If you find yourself struggling to make payments to your creditors, it's crucial to seek advice. You can get free and confidential assistance by contacting organisations like the Citizens Advice Bureau, Step Change, and Money Helper.

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What If You Are Refused Car Finance?

First, double-check your application form for any errors or missing information. Even a simple mistake or inconsistency in applications could result in rejection. Make sure you have all the necessary supporting documents, such as proof of address and employment. Fixing these errors can improve your chances of approval, some of them do take time to have an effect.

It's also wise to review your personal credit report for any registered adverse credit that could be affecting your score.

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Here are some things to look out for before applying for motor finance:

• High Credit Utilisation Ratio: The credit utilisation ratio is the amount of money you currently owe compared to your credit limit. For example, if you have a credit card with a £1,000 limit and you owe £900, your credit utilisation ratio is 90%. It shows how much of your available credit you're using, and could send a message to lenders that you do not have much disposable income and may struggle with additional financial commitment.
• County Court Judgement (CCJ): A County Court Judgement is a court order that requires you to repay a debt you owe. CCJs are typically issued in England, Wales, and Northern Ireland. If you receive a CCJ, you have two weeks to respond and address the situation. For more detailed information on CCJs, visit sites such as MoneyHelper.
• Default: A default occurs when you fail to meet the terms of your credit agreement and your lender cancels the agreement. This usually happens when you miss payments or don't repay the required amount. When you receive a default notice from your creditor, it serves as a warning to make the full repayment. If you fail to do so, the default may be applied to your credit history. It's important to note that you can only default on a debt once, but further action can be taken afterward, such as your debt being sent to a debt collection agency. Defaulting can have a significant negative impact on your overall credit score.
• IVA: An Individual Voluntary Arrangement (IVA) is a formal and legally binding agreement between you and your creditors to pay back your debts over an agreed period. It is approved by the court, meaning that you and your creditors must stick to the arrangement made.

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Remember, different lenders have different criteria, so being rejected by one doesn't mean you'll be rejected by all lenders. There are specialist lenders that will still lend to customers who have defaults, CCJs and IVAs.

If you've been refused car finance or want to wait for a better deal with a lower interest rate, you can work on improving your credit score.

Here are a few tips:

• Check your credit report for errors or fraudulent activity. Ensure the information on your application form matches your credit report.
• Build up your credit history. If you have little or no credit history it can be difficult for companies to score you, which can result in a lower score. Consider options such as credit cards, but ensure that you read the terms and conditions carefully. By doing this, you will not be putting yourself into financial distress. There are credit card companies that specialise in helping customers with little or a poor credit rating.
• Avoid applying for too much new credit, as it can lower your credit score. Only open credit accounts that you genuinely need and can manage.
• Don't necessarily rush to close old credit accounts. Keeping an old account with a good payment history can have a positive impact on your credit report.
• Make timely payments on all bills, as your payment history contributes to your credit report. Set up direct debits or reminders to stay on track. You need to ensure that your payment clears by the due date given to ensure that late payment notifications are not added to your credit file. Some customers are not aware that this can happen.
• Keep your credit use low and payments manageable. If you are frequently near the credit limits on things such as credit cards and bank overdrafts, this suggests that you do not have enough disposable income to receive more credit and could be starting to struggle with the financial commitments that you already have. Even if you have no missed payments or adverse credit, if your credit utilisation is considered high, you may not be considered for finance, or be offered a higher rate of interest to reflect the perceived credit risk.
• Ensure you are registered to vote, as it improves your chances of approval. You can choose to remove yourself from the open register if you have privacy concerns and do not want to be targeted by cold callers selling products or services.
• Ensure defaults and insolvencies are shown as satisfied once they have been settled and removed from your credit history once the appropriate time has passed. Confirm this with all three credit reference agencies.

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At Vision Funding, we understand that having bad credit doesn't define your financial future. Very often, it happens due to circumstances that are out of our control such as redundancy, divorce, bereavement, and economic downturns. It can happen very quickly but takes much longer to get back on track. We have over 20 years of experience helping customers with credit scores and ratings that are less than perfect. Our expert team and panel of specialist lenders are here to help motor dealers and their customers explore car finance options and get the best possible outcome for their individual needs.

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In Summary

The process of credit checks is essential for assessing your ability to borrow money or access certain services. It helps protect you from potential financial harm. It's important to know the difference between soft and hard credit checks so that you can make informed choices and safeguard your credit health. By carefully managing when and where you apply for credit, utilising soft credit checks, and keeping an eye on your credit profile, you can navigate the credit assessment process confidently and maintain a healthy credit score.

If you have a less than perfect credit score, there are often still finance options to buy a motor vehicle. Whilst your choice may be more limited, you are still able to buy a vehicle and start to rebuild your overall credit profile.

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Making motor finance transparent

If you are a motor dealership looking to expand your finance options, Vision Funding is here to help. Get in touch with one of our team about making the switch to Vision Funding. You can reach us over on our contact page and one of the team will be in touch.

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