If you’re in the process of researching finance options ahead of a new car purchase, you’re no doubt wondering what type of credit score is required for a car loan.
On top of this major question, it’s essential to consider how your credit score can impact the terms, repayments, and interest rates on the money that you’re borrowing and your overall borrowing capacity. The question of what represents a good credit score here in Australia can often mean the difference between securing an attractive loan on your terms, and being offered a less competitive loan that can leave you paying thousands more than you might have originally planned.
In this article, we’re going to break down the major components of what makes up your credit score, how credit ratings impact your borrowing capacity, and what the requirements are for car financing here in Australia.
What is a Credit Score?
Let’s start with the basics. A credit score, otherwise known as a credit rating, is a number that is assigned to you that acts as a reflection of your capacity to borrow money and pay that money back in a reasonable amount of time.
Quite simply, it’s a number assigned to you on the basis of your previous financial history that gives lenders a clearer picture how well you have been able to pay off any previous debts, which the lenders often use to paint a picture of your ability to pay them back, too.
Here in Australia, a credit score is a number that sits anywhere between 0 and up to 1,2000, which can vary depending on the credit bureau that is returning the credit score. This separates the previous credit history of borrowers into the categories of excellent, very good, good, fair and weak. An excellent credit score can often result in more attractive interest rates applied to your loan, and even a higher borrowing capacity, while a fair or poor credit score can result in higher repayments and lowered borrowing capacity, as the financial institution deems you more at risk of repaying that loan, due to a low credit rating.
What Impacts Your Credit Score?
There are a number of things that can both positively and negatively impact your credit score here in Australia. The main factors that can lower your credit score centre on your ability to pay previous loans, credit card payments or a history of paying utility bills late. A history of missing credit or loan repayments signals to lenders that a loan applicant may continue this trend, which is what they are trying to avoid. Other factors that can harm your credit rating include the misuse of any buy now, pay later services that display an inability to consistently pay your debts, which represents a potential risk for financial institutions in the future.
Where Can You Check Your Credit Score in Australia?
The process of checking your credit score in Australia is a simple task, with a number of credit bureaus offering credit checks on their online portals. Keep in mind that while these credit reporting bodies can often charge a fee to check your credit history, according to the Office of the Australian Information Commissioner, they must give Australians access to their consumer credit report completely free, every three months.
You are also entitled to request a free credit report check if you’ve been refused credit or a loan in the previous three-months, or any credit-related personal information has been changed recently.
The major Australian credit bureaus that offer free credit reports include Wisr, Experian, Equifax, and illion.
What is a Good Credit Score to Buy a Car?
It should come as no surprise that a higher credit score results in added borrowing capacity and more attractive rates for loan applicants, but that doesn’t mean that you need a perfect credit rating to secure a loan to buy a car, for example.
As a general rule, if your credit report offers a scale of 0-1,000, a credit score above 500 is considered adequate in the eyes of a lender, while a score above 650 is considered excellent. For credit ratings scored on a scale from 0-1,200, a ranking around 650 is considered adequate, while a credit score above 850 is deemed excellent, in the eyes of the lender, and a good indication that you can be trusted to pay back the loan, plus the interest rates.
While it’s impossible to say exactly what the minimum credit score is for a car loan here in Australia, using the scale provided on credit reports gives us a clear picture of what constitutes a ‘good’ and ‘excellent’ credit history, which can help you secure a competitive loan with attractive rates and repayments. As you’ll discover, it’s still possible to secure a car loan and purchase a new vehicle with a lower credit rating, but this can often result in increased repayments with higher interest rates.
What Interest Rate to Expect With Your Credit Score?
As we’ve discovered, your credit score gives lenders a clear picture of your ability to repay a loan. This, in turn, allows lenders to offer different borrowing capacities with varying interest rates to applicants based on their credit score. Exactly what interest rate you can expect with your credit score depends largely where you sit on the spectrum, and whether or not you score in the good to excellent range.
A credit score above 500 (on the scale of 0-1,000) or above 650 (on the scale of 0-1,200) will often be met with lower and more attractive interest rates, because the lender is confident in your ability to repay the loan. This means that if your credit score ranks somewhere in the good to excellent range, you are more likely to qualify for a loan with a lower interest rate attached, as the lender recognises that you’re more likely to repay the loan than someone that ranks in the fair to weak range. This, depending on the loan amount and terms, could result in a several percentage difference in the interest rate attached to the loan, where applicants with a lower credit rating are likely to pay more interest over the course of the loan.
How to Improve Your Credit Score
It’s important to remember that credit scores are not a fixed figure, and they can be improved upon with a number of fairly simple techniques. The most effective way to improve your credit score for a home or a car loan, for example, is to pay off any existing debts that you may have accumulated in the past.
Credit bureaus here in Australia will recognise a pattern of consistent payments toward something like credit card debt, for example, and can positively influence your credit score. It’s also essential that you stick to a pattern of paying off any debts or utility bills on time. If a utility bill valued at more than $150 is left unpaid and has your name attached to it, this can be reported as a ‘default’ on your credit report, which stays in place for five years here in Australia.
Another way to improve your credit score is to avoid applying for new credit, unless it is absolutely necessary. The simple process of applying for credit is recorded on your credit report, and if you were to make several applications in a short period of time, it can be recorded on your credit history that you may be experiencing ‘credit stress,’ which can impact your overall credit score. Finally, actually checking your credit report for any duplicate or incorrect debt listings is essential to ensure your history is accurate and up-to-date. At times, repayments on credit can be left unrecorded, which is extremely important to rectify.
Check existing credit report for any inaccuracies that might be hurting your credit score
Pay off existing debt
Lower your credit limit
Pay bills before their due date
Reduce your credit applications
Avoid applying for new credit cards
Pay credit cards and loan fees on time
Keep credit accounts open; even if you’re not using them anymore
Avoid frequently changing your employment
Contact a financial expert for guidance and advice on credit and budgeting
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