How Your Credit Score Affects Car Finance in Australia

Your credit score is one of the most influential factors in determining whether you can get a car loan and what interest rate you will pay. Understanding how credit scores work in Australia and their impact on car finance can help you prepare for a successful loan application and potentially save thousands of dollars in interest over your loan term.

What Is a Credit Score?

A credit score is a numerical representation of your creditworthiness, calculated based on your credit history. In Australia, credit scores typically range from 0 to 1,000 or 0 to 1,200 depending on the credit reporting agency. The three main credit bureaus in Australia are Equifax, Experian, and Illion, and each may calculate your score slightly differently.

Your credit score is derived from information in your credit report, which includes your history of credit applications, existing credit accounts, repayment behaviour, any defaults or bankruptcies, and court judgments related to debt. Lenders use this score as a quick way to assess the risk of lending to you.

Generally, scores are categorised as follows: below 500 is considered poor, 500 to 599 is below average, 600 to 699 is fair, 700 to 799 is good, and 800 and above is excellent. However, each lender has their own criteria for what they consider acceptable.

How Credit Scores Impact Car Loan Applications

When you apply for a car loan, the lender will request your credit report and score as part of their assessment process. Your credit score influences several aspects of your application.

Approval Decision: A higher credit score increases your chances of approval. Some lenders have minimum score requirements and will automatically decline applications that fall below their threshold. Others take a more holistic view but still weight the credit score heavily in their decision.

Interest Rate: This is where credit scores have the most significant financial impact. Borrowers with excellent credit scores typically qualify for the lowest advertised rates, while those with lower scores may pay substantially more. The difference between a good and poor credit score could mean paying several percentage points more in interest annually.

Loan Amount: Your credit score may affect how much a lender is willing to lend you. Someone with a lower score might be offered a smaller maximum loan amount to reduce the lender's risk exposure.

Loan Terms: Some lenders may restrict certain features or require additional conditions for borrowers with lower scores. This might include requiring a larger deposit, not allowing balloon payments, or mandating the loan be secured against the vehicle.

The Cost Difference of Credit Scores

To illustrate how significant credit scores can be, consider a $30,000 car loan over five years. A borrower with an excellent credit score might secure a rate of 6 percent, resulting in monthly repayments of about $580 and total interest of approximately $4,800 over the loan term.

A borrower with a fair credit score might pay 9 percent, pushing monthly repayments to around $623 and total interest to approximately $7,380. That is an extra $2,580 in interest costs simply due to a lower credit score. For someone with poor credit paying 14 percent, monthly repayments would be approximately $698 with total interest exceeding $11,800, more than double what the excellent credit borrower pays.

Use our car finance calculator to see how different interest rates affect your repayments and total costs.

Checking Your Credit Score

Before applying for a car loan, it is wise to check your credit score and report. In Australia, you are entitled to a free copy of your credit report from each of the three main bureaus once a year. Several websites also offer free credit score checks, though some require registration.

When reviewing your report, look for any errors or outdated information that might be dragging down your score. Common issues include accounts that have been paid off but still show as open, incorrect personal details, or debts that do not belong to you. You have the right to dispute any errors with the credit bureau.

Understanding your score before applying helps you set realistic expectations and avoid wasting time applying to lenders whose requirements you do not meet. Each loan application creates a hard inquiry on your credit report, and too many inquiries in a short period can negatively affect your score.

Improving Your Credit Score

If your credit score is lower than you would like, there are strategies to improve it before applying for car finance. The timeline for improvement depends on your specific situation, but positive changes can start showing within a few months.

Pay Bills on Time: Payment history is a major factor in credit scores. Set up automatic payments or reminders to ensure you never miss due dates. Even utility bills and phone contracts can affect your score if they go to collections.

Reduce Existing Debt: High credit card balances relative to your limits can hurt your score. Try to keep credit card utilisation below 30 percent of your limit. Paying down existing debts also improves your debt-to-income ratio, which lenders consider.

Limit New Credit Applications: Each application creates an inquiry that can temporarily lower your score. Avoid applying for new credit cards or loans in the months before your car loan application.

Keep Old Accounts Open: The length of your credit history matters. Even if you no longer use an old credit card, keeping the account open contributes to your credit history length and available credit.

Address Defaults: If you have defaults on your credit file, explore whether they can be paid and marked as settled. While the default will remain on your record for several years, a settled default looks better than an outstanding one.

Options for Lower Credit Scores

If your credit score is not where you want it to be but you need a car now, options still exist. Specialist lenders work with borrowers who have impaired credit, though their rates will be higher. Providing a larger deposit reduces the lender's risk and can improve your chances of approval.

Having a co-signer with good credit is another option. Their creditworthiness supports your application, though they become equally responsible for the loan. Secured loans where the vehicle serves as collateral may also be easier to obtain than unsecured options.

Consider whether waiting a few months to improve your score might save you significantly in interest costs. Calculate the difference using our car loan calculator and weigh it against the urgency of your vehicle needs.