A high credit score makes it easier for you to access the best car finance rates when taking out a car loan.
But what is a credit score, and what does it mean to have “good” or “bad” credit?
In this article, we’ll explore how your credit score is calculated, tips for improving it and advice on how you can leverage your credit score to get better car loans.
Understanding your credit score
Put simply, lenders use your credit score to assess how risky it is to lend you money.
Your score is determined by your financial history, specifically your:
- Past and present borrowing habits
- The number of times you’ve applied for credit
- Your track record on making repayments
If you manage your debts responsibly and make all repayments on time, you’ll likely have an above-average credit score. If not, your score will be lower.
If you have a low credit score, you may have trouble obtaining a loan because lenders will label you as high-risk. If you are approved for a loan, it’ll probably come with a higher interest rate to offset that risk. In contrast, a high credit score will make it easier for you to obtain financing with better interest rates and attractive terms.
Tips to boost your credit score
If your credit score is less than perfect, don’t despair. You can improve your score by demonstrating that you’ve become more financially responsible.
Here’s how:
1. Regularly check your credit report
A great first step to improving your credit score is checking your credit report often. In doing so, you’ll get a better understanding of your score and how it responds to your changing financial habits. It’ll also give you an opportunity to identify any errors in your report and have these rectified to improve your score.
2. Pay your bills on time
35% of your credit score is determined by your repayment history. A history of missed repayments will negatively impact your credit score, but paying your future bills on time will help you improve it. Committing to timely repayments will also signal to your potential lender that you’ve become more financially responsible. Set up reminders and direct debits to ensure you don’t miss payments, and try to pay off any outstanding debt to improve your debt-to-income ratio.
3. Reduce your credit card balances
You don’t need to get rid of all your credit cards. In fact, effectively managing your credit cards can help you improve your credit score. However, you do need to demonstrate that you can use them responsibly. Generally, this means reducing your number of credit cards and the amount of credit you use. Credit reports only include your latest credit limits and balances, so maintaining a credit utilisation rate of less than 30% is a great way to improve your credit score quickly.
4. Limit your applications for new credit cards
A large number of credit card (or loan) applications in a short period of time will negatively impact your credit score. It will also signal to potential lenders that you’re either using credit to pay back your existing debts or that you’re shopping around because you’re struggling to get favourable terms. Both are signs that you may be a high-risk borrower. Instead, try to space your credit applications out at least six months apart.
5. Accessing better loan rates with an improved credit score
Imagine there are two people who each take out a $20,000 car loan that’ll be repaid monthly over five years. The first person has a high credit score, meaning they can access a lower interest rate, while the second person has a low credit score, limiting their interest options.
Let’s see what the impact of this difference is over the course of the loan term:
Person one: High credit score
Interest rate: 6%
Total interest paid over loan term: $3,199
Person two: Low credit score
Interest rate: 10%
Total interest paid over loan term: $5,496
Over five years, the person with a high credit score will save $2,297 in total interest payments, representing a monthly saving of $38.
A higher credit score will also make it easier to access:
- Higher loan amounts with a lower deposit
- Reduced fees
- Faster loan approvals
- Flexible repayment options
Choose Yes Loans for your next car loan
At Yes Loans, our team of experienced brokers specialise in car loans. We can provide low-interest car loans and deliver a quick turnaround on your loan application so you can be in your new car faster.
To enquire about Australia-wide and Perth car finance options, contact us today – we say YES more often.