Your credit score not only affects whether you can get a car loan but also what interest rate you will be charged and how much you can borrow. Having a positive credit rating can make the process of getting a car loan quick and easy.
On the other hand, if you have a poor credit score, it may be necessary to modify your financial habits to increase your creditworthiness. By understanding your credit rating, you can better gauge your financial standing and take appropriate actions to improve it if necessary.
What is a Credit Score?
A credit score serves as a measure of an individual’s debt and credit history. It is used by banks and other lenders to assess the suitability of an applicant for a loan. Individuals with a higher credit score are considered less risky and are more likely to be viewed favorably by lenders.
Equifax assigns a credit score ranging from 0 to 1,200 in their credit reports. Please note that other credit reporting agencies may employ slightly different scales. Equifax has the following ratings:
- Poor (0–459)
- Fair (460–660)
- Good (661–734)
- Very Good (735–852)
- Excellent (853–1,200)
What is an Average Credit Score?
Have you ever wondered how your credit score stacks up against the average Joe Blow? In Australia, the average Equifax credit score is 846 out of a potential 1,200. A score of 846 is deemed a “very good” rating. This data is based on the 2022 Equifax Australian Credit Scorecard.
If you are thinking of applying for a loan or are simply just curious, you can obtain your credit score from various companies, including Equifax, Illion and Experian.
How Does My Score Affect My Car Loan?
Improving your credit score increases the likelihood of a car loan approval. It can also give you access to lower interest rates and higher credit limits.
- Car Loan Approval: When applying for a loan, banks and lenders evaluate your credit rating to assess the level of risk you pose as a borrower. A higher credit score increases your chances of being approved for loans, credit cards, or other forms of credit. The higher your credit score the less financial risk you pose to lenders.
- Lenders are more willing to lend money to those who are more likely to pay it back! A low credit score is often a significant factor in loan rejections. This is particularly true for larger loans, like a home loan, where lenders are typically more cautious and hesitant to lend to individuals with poor credit.
- Higher credit limits: A higher credit score also gives you access to loans with more favorable terms, such as lower interest rates and higher credit limits. You can borrow more money when you have good financial habits.
- Lower Interest Rates: Lenders offer ‘rate for risk’. Lenders look at the individual’s profile to determine the risk. The higher the risk to the lender the higher the interest rate they will charge.
How can I Improve My Credit Score?
Now you know why you need a good credit score you may be looking to improve yours. Remember, improving your credit score is a gradual process. It requires consistent effort and responsible financial behavior.
By following these steps and practicing good financial habits, you can gradually rebuild and improve your credit rating over time.
Our 6 most effective tips for boosting your credit score are listed below.
- Make timely payments: Ensure that all your bills and loans, including mortgages and credit cards, are paid on time. Consider setting up automatic payments through online banking to avoid missing any payment deadlines. This will avoid late payments and defaults being listed on your credit report.
- Reduce unnecessary credit cards: If you have multiple credit cards, consider closing the ones you don’t need. Having fewer credit cards can simplify your finances and reduce the risk of accumulating excessive debt.
- Lower credit card limits: For the credit cards you plan to keep, consider reducing their credit limits. This can help improve your credit utilization ratio, which is the amount of available credit you use.
- Minimize loan applications: Avoid submitting multiple loan applications within a short period, as this can negatively impact your credit score. Each application typically triggers a credit inquiry, which can be viewed unfavorably by lenders. Avoid unnecessary credit file enquiries and potential declines by using a reputable finance brokerage. Many people are not aware that applying online for credit cards and personal loans trigger credit enquires and this affects your credit rating.
- Regularly check your credit report: Monitor your credit report for any inaccuracies or fraudulent activity and address them promptly. It is not uncommon to find errors caused by incorrect reporting from lenders, but it is essential to address these issues promptly. In some cases, such discrepancies could be a result of identity theft, which requires immediate action.
- Establish and maintain a good credit history: Building a positive credit history is important, especially for individuals who are starting to establish their credit score. Taking out small loans or obtaining a credit card can help you build credit, and maintaining good credit habits can lead to an improved rating over time.
Even if you are not currently seeking a loan, taking these steps will ensure you are setting yourself up for success when applying for loans in the future. It is important to note that items listed on your credit report remain there for a minimum of 2 to 5 years.
What is the Best Way to Apply for a Car Loan?
Using a reputable finance broker is the best way to apply for a car loan. Why? Finance brokers have access to many lenders and are experts in their field. They know how to structure a loan application to put your best foot forward. A broker has more ‘buying power’ and can negotiate the best car loan interest rate possible for your unique situation.
On the other hand, a car dealership has one, maybe 2 lenders. If your circumstances don’t meet this lenders’ criterion, your loan application will be declined. Having your loan declined is negative for your credit rating and the next lender to look at your application will wonder why you were declined.
Going directly to your bank limits your options to just the one lender. Some banks do not even have a secured car loan option and will instead offer a personal loan option. Personal loans are riskier for the lender and as such attract a higher interest rate. This is because personal loans do not use the vehicle as security against the loan.