8 things you should know about your credit score before applying for a car loan

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    Credit scores play a crucial role for a lender deciding whether to give someone a car loan and at what interest rate, but two-thirds of Australian’s don't even know their own credit score.

    Let’s jump into the 8 things you should know about your credit score before applying for a car loan:

    1. A credit score is a single numerical summary of your credit history

    Typically between 0 and 1,000, a credit score is a numerical value that lenders use to evaluate the probability that an individual will repay their debts. They’re designed to help make decisions easier for lenders, summarising a customer’s likelihood to pay back their loan without the hassle of looking at a full customer credit history.

    Credit scores are calculated by credit bureaus, who collect information on customers such as the number and types of credit accounts, how long each account has been open, the number of enquiries on the file (even if you didn’t go ahead with a loan!), any bankruptcies or defaults and other such information which, when combined, forms an individual’s credit history. 

    The higher your credit score, the more likely you are to get approved for a loan at a good interest rate. 

    2. Credit scores and credit histories are different things

    Although related, credit scores and credit histories are different things and the distinction is important.

    A credit score is a single number that summarises your credit history. Checking your credit score (if done correctly!) won’t be recorded on your credit history, and therefore won’t impact your ability to get credit in the future.

    Your credit history is a detailed summary of your financial history in the form of a credit report, which includes granular information on previous credit products, bankruptcies, defaults and repayment history.

    Every time a lender pulls your credit history, an enquiry is recorded on your credit report that will remain there for five years.

    That’s why the Driva platform only looks at your credit score when getting your personalised car loan quotes.

    3. Definition of a “good” credit score can vary, depending on who you ask

    There are 3 main credit bureaus in Australia - illionEquifax and Experian. Each collects different information about consumers, and each has different credit scoring systems.

    Because of this, your credit score might be slightly different for each of the three companies.

    As a general rule, your credit score ranking can be broken down into categories:

    • Excellent: 800-1,000
    • Very good: 700-799
    • Good: 625-699
    • Fair: 550-624
    • Below average: 300-549
    • Not eligible for car loans: 0-299

    These rankings are based on the Equifax credit score, which is the score used by most Driva lenders, but these ranking vary by provider:

     4. Every lender will check your credit history

     Every lender has a minimum credit score requirement. While the cut off for each lender is not publicly available, the minimum credit score to get a loan through the Driva platform is 300. Our platform has the credit policies for each lender built-in, so we can help ensure we’re giving you more accurate pricing based on your specific credit score without even making a formal enquiry on your file. 

    Consumers should be careful before submitting a full application for a loan, because while getting a quote won’t impact your credit history, once you’ve lodged a loan application lenders will run an inquiry which will be on your credit file permanently. 

    5. A credit score is not the same as a credit file

     To get a personalised loan quote, Driva checks your credit score. This doesn’t impact your credit history, but returns a numerical value that allows us to match you with your eligible rates from our panel of lenders.

    Once you choose to submit an application and we have worked to confirm your eligibility, only then will a lender pull your full credit file for a final check for any bankruptcies or outstanding loans that were not previously declared.

     6. Depending on where you’re applying, even a failed loan application can impact credit score

    Each credit history enquiry remains on your file for five years. Numerous failed enquiries on your file is a red flag that your credit applications have been rejected by other lenders, and may impact your future applications.

    Some providers of credit assistance will send your loan application to a lender without first checking your eligibility, which results in a full enquiry being made and a negative impact on your credit history if you’re not eligible.

    Driva doesn't make an enquiry unless we know you'll meet the minimum credit score requirement for your chosen lender 

    Driva waits to confirm your eligibility based on your credit score and an assessment of your income, expenses and other personal circumstances before lodging your application with your chosen lender.

    Consumers should be weary when considering car finance from dealerships or other loan providers, and always ask whether your credit score will be impacted before providing your personal details.

     7. Never had a loan? This doesn't mean you're going to have a good credit score

    Never missed a payment on a loan? Never even had a loan? You must have the perfect credit score, right? Not necessarily. 

    Credit scores are calculated based on a person’s demonstrated ability to consistently be responsible with credit products. This means if you’ve never had a loan, there’s no proof in your credit history that you’ll meet your repayments and lenders will treat you as an unknown. 

    Credit scores don’t start at 1,000 and only reduce when repayments are missed. In fact, you’ll have trouble getting a car loan with any lender if you haven’t used credit before. Some of the highest credit scores are from individuals with a large mortgage balance who have been consistently making their repayments over a number of years.

    8. You can establish credit history without taking out a loan

    So what comes first, the chicken or the egg? The credit or the credit score?

    Well you don’t need a car loan to start building your credit history. Most introductory credit cards or small personal loans don’t require a prior credit history - just steady employment.

    While we’re not suggesting anyone should apply for a credit card if they don’t need one, they can be a good way to start building your credit file and often come with great perks like frequent flyer points. 

    Utility and phone bills show on your credit score too - so the day you move out of home your credit history will start to build. Just like a loan, defaults from utilities and phone companies will be recorded on your credit report. So late phone or electricity bill payments can impact your credit history, just as loan defaults do.

    With the Driva platform, you can check your eligibility for car loans for free (without impacting your credit score) 

    Understanding your credit score is important, but what does your credit score mean as it relates to car loans?

    Unlike traditional comparison sites, we won’t just list the starting rates for various lenders. We’ll show you which loans you’re eligible for, and give you real, personalised rates from our entire panel of over 30 lenders tailored to your circumstances (including your credit score!).

    If you want to see how your credit score translates to car loan rates, let our smart platform do the work for you.

    Learn more: How Much Should You Spend On A Car?

    William Brown

    William Brown is the co-founder of start-up Driva, an online car loan marketplace helping customers fight back against the car financing process - providing options and transparency to empower customer choice.

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