Why your credit score matters when applying for vehicle finance
If you’ve ever applied for vehicle finance, your credit score may not have come up in conversation directly – but behind the scenes, it would have informed the finance team’s discussions about whether to approve or decline your application.
The influence of your credit score on most financial decision-making makes it essential for you to manage it proactively.
In this article, we break down the credit score to its basics to help you build yours up and achieve your best possible score.
What is a credit score?
A credit score is a three-digit number that reflects your creditworthiness when applying for loans – including vehicle finance.
It indicates how reliable you are when it comes to managing credit and repaying debt.
Credit bureaus like XDS, TransUnion, and Experian compile your credit report and calculate your score.
Scores from XDS (which is where we get your score) typically range between 300 and 950, with higher scores indicating better creditworthiness.
A high credit score suggests you are a low-risk borrower, which can make it easier to secure vehicle financing at favourable terms.
On the other hand, a low credit score may indicate higher financial risk, which can lead to higher interest rates or vehicle finance denials.
The Finance365 team considers your credit score to be as critical as your ID number, as it is a tool used by most financial decision-makers to gauge your reliability.
For example, while lenders use it to determine whether to approve your vehicle finance application -and at what interest rate – landlords may also check your score to ensure you’re likely to pay your rent on time.
Employers in some industries also review credit scores to assess financial responsibility, especially for money management roles.
Even service providers such as cellular contract providers could consider it in assessing whether you are eligible for a new contract.
How is your credit score calculated?
Several factors influence the calculation of your credit score and understanding these can empower you to manage and improve your score effectively.
One of the most important components is your payment history, which accounts for approximately 35% of your score. This measures your reliability in paying off debts on time.
Consistently meeting payment deadlines for credit cards, loans, and bills can significantly boost your score.
On the flip side, missed payments, defaults, or events like bankruptcy can negatively affect your creditworthiness.
Another critical factor is your credit utilisation ratio, making up about 30% of your score. This refers to the percentage of available credit you’re using.
For example, if you have a credit card limit of R10,000 and have spent R2,000, your utilisation rate is 20%.
Financial experts recommend keeping this ratio below 50% to maintain a healthy credit score, as a lower utilisation rate indicates responsible credit management.
The length of your credit history, contributing approximately 15%, also plays a role.
A longer credit history generally helps your score, as it provides lenders with more data to evaluate your financial behaviour.
This is why it’s beneficial to keep older credit accounts open, even if you’re no longer actively using them.
Your credit mix, which accounts for around 10% of your score, is another key aspect.
Having various credit types, such as credit cards, home loans, and car loans, demonstrates your ability to manage different forms of debt effectively.
Lenders view this diversity as a sign of financial responsibility.
Finally, new credit inquiries make up about 10% of your score. Every time you apply for a new line of credit, lenders perform a “hard inquiry” on your credit report, which can temporarily lower your score.
Frequent applications within a short period may signal financial stress to lenders, so it’s wise to apply for credit only when necessary.
Get your credit score!
If you are looking to apply for vehicle financing, check your credit score today with Finance365.
With us, checking your credit score is simple and free, and because Finance365 performs “soft” credit checks, they don’t impact your credit score.
Don’t be afraid to ask our financial wellness coaches to join your journey either, because your financial journey doesn’t have to be a solo ride.
You can also leverage Finance365’s free alert service to stay on top of changes to your credit score.
Take the next step by checking your credit score with Finance365 today!
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