When you apply for a car loan, you’re going to get asked about your credit score. Credit scores aren’t just arbitrary numbers assigned to you; they’re an indication of your current financial status. Your credit score can help or hinder you when getting financing to buy a car.
Lenders use credit scores to determine whether a person is capable of making their repayments. No lenders wants to risk loaning money to someone who might not be able to pay it back. If you have a high credit score, lenders will see you as financially capable and are likely to provide you with a car loan and good interest rates.
On the flip side, a low credit score tells lenders that your current financial status is not ideal. Having a low credit score means it will be harder for you to get approved for a loan. And if you do get approved for a loan, you might be saddled with higher interest rates.
Understanding credit scores, knowing what they are and how they’re determined, and how you can improve them is key to getting a good car loan. Let’s demystify credit scores and get you one step closer to buying the car of your dreams.
Credit Score: Explaining the basics
Before we delve into how your credit score affects your loans, let’s make sure we cover the fundamentals.
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 at handling your finances.
Your credit score is so important for lenders because it indicates the risk of lending money to you. If you have a good credit score, this tells lenders that you’re more likely to make your repayments. Conversely, if you have a bad credit score, lenders may take this as a sign that you’re likely to default on your loan.
Where and how can you get your credit score?
You can get a credit report that details your credit score and other relevant information from credit bureaus. Credit bureaus are organisations that collect, maintain, and issue credit history data. From this financial information, the credit bureaus will generate your credit report where they will base your credit score on.
In Australia, there are three main credit bureaus you can get your credit score from. Experian, Equifax, and Illion (formerly known as Dun & Bradstreet) are all credit reporting agencies that provide consumer credit reports. Contact one of these credit agencies to get a free credit report. You can usually access your credit report online or get in touch with the credit agencies through phone or email and they’ll send it to you within 10 days.
Take note that a credit reporting body must provide you access to your consumer credit report for free once every three months. You can also request a free copy if you’ve been refused credit within the past 90 days or a correction on credit-related personal information was made. You can be charged a fee when requesting for a credit report outside of the above situations, but it should not be too excessive.
There are also other credit services like the Tasmanian Collection Service who partner with credit reporting bodies to help you get your credit report. Credit agencies may have different information which means your credit score may differ slightly depending on the agency.
What type of information is your credit score on?
Credit providers like utility companies, private lenders and banks send information to credit bureaus when 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
- Pattern of credit enquiries over time
- Personal details
- Default information on credit report
- Court writs and default judgments
- Commercial address information
Experian Credit Score, on the other hand, 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). The higher the credit score you have, the better chance you’ll get approved for a loan.
You can request a credit report from each credit agency to see which one is a more accurate reflection of your financial status.
What is a good credit score?
Just as different credit agencies have different ways to calculate your credit score, they also have slightly varying scoring systems. 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. Here is how Equifax and Experian measure credit score benchmarks:
|Below Average||0 to 509||0 to 549|
|Average||510 to 621||550 to 624|
|Good||622 to 725||625 to 699|
|Very Good||726 to 832||700 to 799|
|Excellent||833 to 1200||800 to 1000|
If you have a below average credit score or rating, it tells lenders you’re a high-risk borrower and you may have difficulty getting your car loan approved. Some lenders could consider approving your car loan but only at a very high-interest rate.
An average credit score improves your chances of getting approved for a car loan, but lenders may still request additional requirements to approve your car loan. If you have a good credit score, you have a better chance of not only getting approved but getting lower interest rates, as well.
A very good credit score will give you a great chance at getting approved for a car loan. With an excellent credit rating, lenders will consider it extremely unlikely for you to default on a loan. This means getting car approval will be easier and you may even get more loan options.
Generally, lenders consider a good credit score in Australia as something around 846 which is classified as ‘Excellent’ by most credit agencies.
Factors that affect your credit score
Your credit score can increase or decrease depending on your ability to pay your loans, history of payment, and a myriad of other aspects. Mainly, your credit score can be affected by these major factors:
This component considers the timeliness of your bill and loan payments, and past bankruptcies or the like. It will also look at frequency of missed or late payments, if any.
This looks into how much available credit you have, and how much you owe on different accounts such as loans, credit cards, and your mortgage.
Length of credit history
This considers how long you’ve been using credit and how old your oldest credit account is.
New credit applications
This means credit agencies will look at any new accounts or new credit applications you may have applied for recently.
Types of credit or loan you have
This looks at the type of credit you use such as credit cards, car loans, personal loans, and other relevant information.
How does a car loan impact your credit score?
A car loan can impact your credit score in a number of different ways. If you submit a car loan application, the lender will do a hard credit check causing your credit score to go down by a few points. Hard credit checks don’t decrease your credit score by much, but applying for a lot of loans at the same time could compound the decreases and affect your credit score significantly.
Another way a car loan impacts your credit score is through payments. As said previously, if you make your loan payments on time and with the right amount, this will reflect well on your credit score. Conversely, if you’re late on your repayments, then it will hurt your credit score.
Can the type of car loan your get affect your credit score?
The two most common types of car loans out there are secured and unsecured loans. Each loan type provides borrowers with their own unique set of advantages and disadvantages. Whether or not a specific type of loan is right for you depends on your current financial situation.
A secured loan is when an asset is tied into your car loan. This asset, also called security, is something that is of significant value like a car, or a house. It will be held against the value of the loan. This means that if you fail to meet your loan payments, the asset will be forfeited to your lender.
Those with bad credit can take advantage of secured loans to get approved for loans with a good rate. Lenders are averse to taking on high risk borrowers, like those with bad credit, but having an asset serve as collateral helps lessen the apprehension. Plus, those with bad credit can use a secured loan as a credit-building tool to improve their scores as long as they keep up with the payments.
Unlike secured loans, unsecured loans don’t require any asset to be used as security. Unsecured loans are typically used for holidays, renovations, paying for a wedding, or similar expenses. The amount you can borrow with unsecured loans is much smaller compared to secured loans.
Because unsecured loans don’t have security, lenders usually charge a higher interest rate on this type of loan. If you fail to make necessary payments on time, this will have a huge negative effect on your credit score.
How your credit score affects car loan interest rates
The higher your credit score is, the lower interest rates you’ll get. And if you have a low credit score, you will likely get a high interest rate. If you have a credit score of 700 and above (or categorised as very good), you can get an interest rate of somewhere around the more favourable market offers for a car loan.
The average car loan interest rate in Australia goes to borrowers with an average to good credit score.
Meanwhile, for those whose credit scores fall below 509 or 550 (also categorised as below average), then you might be paying around a higher interest rate on your car loan.
Should you shop around for car loans?
The short answer is yes! Shopping around for car loans helps you get an idea of what’s in the market currently. You’ll know what the average interest rates are, what loan policies are most common, and other important information.
More importantly, you can save potentially thousands when shopping around for the best rate possible. Taking out a loan is a huge responsibility, and the best way to come out on top is by doing your due diligence. Compare and contrast the different loans available to you and find the one that best suits your needs.
Remember, applying for multiple loans during a short period of time negatively affects your credit score. By making sure you find the perfect loan for you, you’ll avoid getting rejected and sending out more applications than you should.
What is the minimum credit score to get a car loan in Australia?
Technically speaking, you can get a car loan with really bad credit. But that car loan is going to cost you more because of higher interest rates. You may also have trouble getting approved. The best way to get a good rate on your car loan is by getting your credit rating up.
Best ways 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.
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 can have a positive impact on your credit score in the long run. However, your credit score will take a small hit initially because of the credit application. A solution for this is to avoid sending applications in short intervals. 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 is correct. If there are any incorrect details, send out a dispute letter to the credit bureau.
Avoid applying for payday loans
Credit agencies look at the type of loans you take out. Payday loans come with large fees which could work against you if you’re trying to improve your credit score.
Regularly check your credit report
Keep tabs on your credit report to make sure your credit score is accurate. This will save you time correcting information.
Follow these tips above to increase your credit score and get the best rates possible on your car loan.
Paying attention to your credit score is crucial when you’re applying for a loan. Making sure that your credit score is as high as possible will help you get a good loan with a low rate. Start reviewing your credit reports now and build an excellent credit standing. Improve chances of a quick and easy loan approval!
Find the best car loan for you with Aussie! Get in touch with us today and we’ll provide you a and help you find the perfect loan for you.
How can I obtain my credit score in Australia?
Get in touch with a credit bureau or credit agency like Equifax, Experian, and illion. You’ll receive your credit report which includes your credit score.
What factors impact my credit score?
The main factors that affect your credit score are:
- Timeliness of your debt and bill payments
- Amounts paid and amounts owed.
- Length of your credit history.
- Loans you have right now.
- New credit.
What can I do to improve my credit score?
You can improve your credit score by paying your bills on time, apply for new credit accounts, dispute any incorrect entries on your credit report, and paying off your debt.
Will taking out a car loan impact my credit score?
Taking out a car loan, or any loan for that matter, does impact your credit score. This isn’t necessarily a bad thing. As long as you make timely loan payments, then you can keep your credit score in good standing.
If you don’t want your credit score to dip, make sure you don’t miss any repayments, default on your loan, or take out loans you can’t comfortably afford.
How many car loans can I have at once?
You may get as many car loans as you want, however, lenders may not feel comfortable giving you loans if you’re still paying off other debt.
Can I apply for a car loan with a bad credit score?
You can apply for a car loan even with a bad credit score. But the likelihood of your car loan being approved lessens the worse your credit rating is. And if you are approved, you may have to pay a higher interest rate. There are lenders out there who provide bad credit car loans. Contact us at Aussie for more information.
How can I ensure I get the best interest rate for my car loan?
Get the best interest rate for your car loan by shopping around and comparing different loans from various lenders. You’ll also likely get a lower interest rate if you have a good credit score.
How does paying off a car loan impact my credit score?
Paying off your car loan improves your credit score because it lessens your debt-to-income ratio. It’s also a good idea to pay off your car loan ahead of time, if you’re able.
Can I refinance my car loan?
You can refinance your car loan, but it may have a negative impact on your credit score. Refinancing your car loan could it could generate a hard credit inquiry and lower your account’s average age. If you report your refinanced loan as a new loan, it will have a larger impact on your credit score.