How does credit scoring actually work?
Credit scores have a huge influence on most of us! Whether you are renting or buying a flat or house, entering into a car finance agreement or even a mobile phone contract, credit reference agencies have a major impact on if we will or will not get accepted for finance or not. Can you think of any other area of your life which has such an impact but in reality we know so little about? Hippo Motor Finance aims to try and demystify how credit scoring works with some hints and tips as to how to find out what your score is and how to apply for, in particular, car finance without damaging your credit score.
Who are the credit reference companies?
First things first, let’s take a look at who exactly the credit reference agencies (sometimes called credit bureaus) are, how they’ve evolved and what do they do?
There are three main credit scoring agencies in the UK, namely: Experian, Equifax and Callcredit (also known as TransUnion). The largest is Experian which established its own identity in 1996, is based in Dublin but also has a headquarters in London. Equifax is the oldest and started way back in 1899 and is the second largest of the three by turnover, based in Atlanta, Georgia. Finally, Callcredit was founded in 1968 and is the smallest of what makes up Big Three of the credit scoring world.
How do credit score companies work?
What do these credit bureaus do? Think of them like massive data warehouses.
They provide credit history information to companies on individuals and businesses and how they have performed financially over time and charge these companies for the privilege. They don’t actually say if you are creditworthy or not, that is for the company to decide themselves but they do provide a score based on your history and your creditworthiness at that point in time which the companies can use to decide if you are likely to pay them back or honour a commitment.
They don’t share information with each other (except perhaps fraud data) and the information they hold on you can come from a variety of sources including the same companies asking for your information or the likes of credit card issuers and banks. They all have different scoring mechanisms and because their sources of information are not the same, they have different gauges of your credit status. Because they have different scales, unfortunately, it’s also not possible to compare scores like for like but while the scores may differ from each other they are generally aligned and allow companies using them to set a threshold below which they are unlikely to grant credit or use the score to decide what APR they will offer you.
Some lenders use all three bureaus while others use only one (normally for cost-saving purposes) but unless a company has devised their own scoring methodology (very rare) your score is likely to be supplied by at least one of these institutions when applying for credit.
How do I find out my credit score?
If you want to know what your credit score is there are a number of ways of going about this.
The credit scoring landscape is ever changing and there have been a number of recent developments. Historically you would have had to apply directly to the bureaus themselves, ask for and pay for your credit report. Most now offer a service whereby you pay a monthly fee and in return, you get a comprehensive credit report.
A more recent development is the rise of technology companies like ClearScore or Credit Kudos. ClearScore, now owned by Experian, offer you a free monthly credit report. That’s right – it’s free! Why would they do this? Because in return for being free they offer you optional access to deals on things like credit cards or personal loans. It’s a win-win deal as it allows you to follow your credit score and in return, they hope to supply you with relevant financial services offers.
You can still go through the normal channels of finding out your score or challenging your score, in which case you could contact the credit reference agencies directly.
Will car finance affect my credit score?
So, at the end of the day, you want to finance a car – what’s the best way to do it? We have a separate article on the different forms of finance available here but, assuming you have decided which one is best for you, what impact are credit scores likely to have on your ability to gain finance?
The first point is a friendly warning: if you don’t have a great credit score then you should be very wary of applying to loads of different brokers or lenders – especially where they may have a ‘hard’ credit search in place. A hard search is one that will leave a ‘footprint’ on your file and having a number of these in a short period of time is very likely to negatively affect your score.
It’s better to use a broker or lender that offers ‘soft’ search which won’t affect your credit rating. Hippo Motor Finance’s Instant Car Finance Check service offers the solution to both the number of searches you make as well as ensuring these have no impact on your credit score. We have a proven panel of 14 lenders and we only use soft search in the first instance which means you get all the choice from having a large panel of lenders but avoid the risk of damaging hard searches as well as having the benefit of a result within 60 seconds!
Done right, credit applications are nothing to fear, but when done badly by brokers and lenders, who don’t have your interests at heart, it can create problems. Stick to proven companies which have a track record who have soft search in place with some serious choice in lenders and you can’t go wrong!
Apply for vehicle finance today by using our Instant Car Finance Check tool or by calling Hippo Motor Finance on 01254 956 777 to discuss your requirements in detail.