Navigating finances: what is a 'bad' credit score?

Navigating finances: what is a 'bad' credit score?

Discover what defines a bad credit score. Get an understanding of the detail so you can make better financial decisions and understand credit challenges.

Understanding credit scores

One of the key things influencing a lender's decision to lend you money or not, and at what rate of interest, is your credit score.

Knowing how and why your credit score is impacted is the first step to getting it in shape; putting you in a stronger financial position. So, lets look at what a credit score is.

Your credit score is part of a file held by independent credit reference agencies. The lender will use one or more of these agencies to check your credit file.

A credit score is a universal way of calculating your ability to repay finance based on a number of factors:

Factors influencing your credit score

Failure to manage these factors over time may result in a poor credit score.

Other considerations which can influence your credit score include any overdrafts you have and/or buy-now-pay-later, like Klarna or ClearPay. 

What is considered a 'bad' credit score?

There are three main credit agencies who hold a file that lenders can access to decide on whether to lend to you, and at what rate. These credit agencies are independent and so the way they categorise good, bad, or fair scores vary. Most lenders will use more than one agency to determine your creditworthiness.

This table shows how much the scoring can vary by agency. Source: Money Saving Expert: Energy Help, Credit Cards, Flight Delays, Shopping and more

Navigating financial challenges

The impact of a 'bad' credit score

A 'bad' or poor credit score will impact the finance provider's decision to lend to you depending on the thresholds they lend within, and determine what interest rate you will be given. A poor credit score, even if you manage to find a willing lender, will mean interest rates will be a lot higher than someone with a good to excellent score.

You may prove too much of a risk for certain lenders, which will rule you out of some of the better deals. There’s also other implications of a poor credit score you might not be aware of. For instance, your insurance premiums may be higher because of it. This may also rule you out of certain career opportunities and may be treated as a factor when you are looking to rent a property.

It's not hard to see why managing your credit score is key to getting better financial outcomes. So, lets look at what you can do to manage and improve your credit score.

How to manage and improve credit scores

Your credit score is a way of predicting how well you’ll be able to pay back credit in the future, so you need to have had credit to prove your creditworthiness.

The best way to manage and improve a credit score is by making your regular payments to your credit accounts, in full and on time.

You should also be managing your score itself. You can do this by checking your credit file against one or more agencies, paying close attention to anything that’s having a negative impact and taking steps to address those.

Car financing and credit scores
A car finance provider will use your credit score to determine whether to lend to you, and at what rate. There will be other factors used to make a lending decision, but the credit score remains key.

'Bad' credit is generally a score below 600, though as we saw from the table above this does vary between agencies. You should always try to improve your score to reduce the cost of any credit you take out but if you are in a position where you need to finance a car and your score is less-than-perfect, then there are steps you can take to make sure it's as good as it can be.

  • Take an in-depth look at your credit file.

  • Report any errors or inaccuracies.

  • Make sure all your active credit accounts hold the same residential and employment details for you.

  • Gather all the documentation you will need for any application, including proof of income, employment, and residence.  

Car finance guidance with a less-than-perfect credit score

Having a less-than-perfect credit score doesn’t mean you won’t be able to get car finance – but you’ll need to find the lenders and loan types that are best suited to your current circumstances.

You can do this by comparing APRs using the pre-approval or soft search option, where available. This allows you to work out which lender is likely to offer you a better rate based on the representative APR, without leaving a mark on your credit file.

There are different loans you could consider, including:

·       Secured loans

·       Guarantor loans

·       Joint application

Strategies for improvement

We’ve looked at the things that impact your credit scores and the things you can do to improve them in order to bolster your chances of getting a good deal. The list below offers a quick snapshot of the practical steps you can take straight away, putting you on the right road for achieving your financial goals.

Practical tips for enhancing credit scores

  • Pay your credit accounts in full and on time.

  • Build a credit history if you don’t have one. You could get a repayment card and pay in full each month.

  • Reduce your credit utilisation versus available credit, as much as possible.

  • Keep some older credit accounts to prove you can manage your accounts responsibly, over time.

  • Get a regular credit file alert from one or more of the credit reference agencies.

The bottom line is your car finance options improve with a healthy credit score. So, where possible, put your energies into that before going out to car finance providers.

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