The truth is that getting car finance without, or with little, credit history is an unlikely event but the good news is that there are plenty of ways to build up your credit profile over a relatively short time period.
Don’t make too many credit applications
The first point to make is that if you know that your credit history is very limited, don’t be tempted to apply to loads of sources for finance as you are more likely to damage your credit history. If you do want to test the waters, make sure that the lender or broker you are using uses “soft search” which means that your credit file will not be negatively impacted by doing a credit search, even if you are rejected.
Thin credit files
On the opposite end of the spectrum, having a ‘thin’ credit file can also impact your finance application.
People have thin credit files for many reasons. The may be relatively young, have shunned credit facilities previously because they wanted to avoid being in any debt, have moved to the UK relatively recently, relied on their partner to set up credit facilities, so they have no or a limited credit footprint.
Whatever the reason that you have a thin credit history, here are some key things you can do to ensure that you start to build a decent file and that lenders will consider you in the future.
Identification is key. The lenders want to make sure that you are who you say you are. They establish this through a number of means but one of the first places they start is the Voters Roll. If you are not on the voter’s role then this is a very positive first step that you can take. Make sure you have a bank account and at least a debit card associated with it. Your bank is also a good place to approach for a credit card with a small facility – which can help to build up your credit profile.
Lenders also like stability. This means that it’s generally better not to move your residence very often. It’s one of the reasons lenders often ask the question, “How long have you been at your current address” followed by the request… “If resident for less than 3 years then please supply all your previous addresses during this period”.
Prove you can pay
Evidence of ability to pay. Lenders, unsurprisingly, want to see if you have a steady income so that their risk of non-payment by you is reduced. This means that unrecorded earnings are not only an issue for the taxman, but also for potential lenders who may want you to prove your earnings, particularly when purchasing something as large as a car. Unfortunately, zero hour contracts are not good news when it comes to applying for credit as the lenders have a greater risk in that you are less protected if a company wished to reduce your hours or part ways or goes into administration.
What can you do to improve your chances of being accepted?
It’s all well and good to know what it is that credit lenders want to see in applican’t, but what tips can someone with a limited or no credit history do?
- Start small. If you apply for too much credit based on your earnings, this may well come up as a fraud alert or at least damage your chances.
- Start smart. You can sign up with free credit score companies like ClearScore to get a monthly update of where you stand relative to your score. It’s very easy and free, plus they have some great hints and tips themselves so well worth the 10 minutes investment in time.
- Store cards. Your first forays into borrowing should be small and steady. For example, look for a store card with a reasonable APR where you can purchase things that you would already buy like clothes. Don’t forget to check that they use soft search and apply for a small credit line – say £300.
- Credit utilisation – the rule of thumb is not to use more than a third of your credit facility, so in the example above, if you have a £300 store card, try not to use more than £100 before paying it off.
- Pay bills on time. It sounds obvious, but make sure you pay your bills on time, missing payments for utility contracts will negatively affect your score for example.
It’s not a great position to be in if you want credit but you have a limited credit history, but you have to start somewhere so if you follow the hints and tips above you will be that much closer to getting sufficient credit for a nice shiny car.
Don’t damage your chances of getting finance for your car – use Hippo Motor Finance’s soft search facility to check if you will be accepted for car finance.