How to build a credit history before applying for a car loan
Many consumers think never having any credit in the past is a good thing. However, credit scores are based on previous behaviours, and you may find yourself with a low credit score due to lack of credit evidence. When you apply for a car loan, lenders will run a credit check on you to see if you’re eligible for finance. If you don’t have any previous credit, it can be harder to get accepted. Let’s take a look at how to build a credit score before applying for car finance to help increase the chances of approval.
What is no credit history?
No credit history simply means you’ve never taken out credit or finance in the past. Having no credit accounts in your name makes you practically invisible to future lenders and can make it harder to get approved for loans. It sounds daft that you need to have credit to get credit for the first time but there are ways in which you can start to build a small credit history before applying for finance.
Why is no credit history bad?
When you take out any sort of loan or finance, lenders will run a credit check on you as a tool to see how likely you are to make your finance payments on time and in full. Lenders use your past credit habits to form presumptions about how you’ll handle their proposed finance. A lack of credit history makes you riskier to lenders as they don’t know how you will act and in turn it could result in your car finance application being refused. It can be hard to come across no credit car dealerships which accept lack of credit history and it may be worth searching for a specialist lender once you’ve built a small credit history.
How can you build a small credit history?
When you’re ready to start building credit, you should create new financial habits and manage your money well. It’s all well and good creating credit but if you don’t handle it responsibly, your credit score could go from non-existent to bad.
1. Register on the electoral roll.
The electoral roll or register is a list of all the people in the UK who are able to vote. The electoral roll holds information like your name and your current address and whether you are on the electoral roll or not is recorded on your credit report. Lenders can use this information as another way to verify who you say you are and where you live.
2. Open a bank account in your name.
Before you can start making repayments back to lenders if you were to be accepted for finance, you will need a bank account to make these payments from. Setting up a UK bank account in your name is a good first step to start building credit. Your accounts will also be recorded on your credit report. Your bank account can then form proof of your income and outgoings and your payment streak.
3. Set up some direct debits.
Once you have a UK bank account, you can set up direct debits to build credit. A direct debit is an authorised payment from your bank to be collected each month by a credit company. If there’s enough money in your account, the direct debit will be automatically collected. If not, it can lead to a missed payment mark on your credit report and negatively impact your credit score. You should try to get your name on some bills such as gas, electricity, a mobile phone contract or home insurance and make sure you meet the repayment each month on time and in full to help increase your score.
4. Make payments on time.
One of the biggest influences on your credit score is how good you are at meeting repayments. If you have issues with meeting repayment deadlines, it can affect your score negatively and put future lenders off. People with good credit scores have low levels of credit but are able to meet their repayments on time and in full.
5. Check your credit report.
Many consumers overlook how influential your credit report can be and the information listed on it. A good financial habit to create is checking your credit score and report once a month to see how financial factors impact your score. You can check your report for free using one of the trusted credit agencies, they are TransUnion, Experian, and Equifax. Each credit agency has their own scoring method, and your credit score may vary with each. When you check your credit report you should make sure all your information is accurate and up to date as misinformation on your credit report can harm your score.