No credit history? How to build one and secure car finance

Not having a credit history can be as much of a barrier to car finance as a poor credit history - here’s how to build yours

John Evans Matt Rigby
Apr 29, 2022

In simple terms, credit is what you have when you borrow money. Whether you’re using a credit card, getting a mortgage or taking out a bank loan, any money loaned to you is considered ‘credit'.

There are a number of credit options when financing a new or used car - two of the most common being Personal Contract Purchase (PCP) and Hire Purchase (HP) - but whatever route you choose to take to finance your purchase, one thing remains the same: the lender needs to be as sure as possible that you will pay the loan back - and with interest.

If a lender can see a proven track record of your ability and willingness to pay back a loan on time and in full, they will naturally be more comfortable with the idea of lending you money. It could also reduce the interest rate applied to the loan.

This record is your credit history, and it's what lenders use to decide whether they're going to accept you for a loan. Each aspect of your credit history contributes to your credit score or rating, and the better your credit rating the greater your chances of getting credit at a favourable interest rate.

Now you might think that never having had to take out a loan before, or deciding not to make use of a credit card would make you appear sensible and financially sound in the eyes of lenders, but unfortunately, that isn't the case. People with a limited credit history are considered to be an unknown quantity by lenders because they have much less insight into the risks of first lending you money and then their chances of getting all of that money back.

No matter how good your intentions are, it's very unlikely you are going to be accepted for a loan if you don't have a substantial credit history. So what can you do if you have no or very little history? Will anyone lend you money and if not, how do you encourage them to? Keep reading for answers to these questions and more.

How do I find out my credit history?

There are three credit agencies that keep official records of peoples’ credit histories. These are Experian (the largest), Equifax and TransUnion. They hold your credit report which includes details of your address, past and present credit agreements, public records including county court judgements (CCJs) against you and financial associates (people you’ve jointly taken out credit with).

From this information, the agencies award you a credit score. You have a legal right to see this score but may have to pay a fee to see additional detail. For a payment, you can have regular updates on your credit history sent to you, as well as your credit score, as calculated by the agency. Find out how to gauge whether your credit score is good enough to finance a car.

Lenders refer to one or all of these agencies and their reports in order to run a credit check on you and calculate their own credit score when you apply for a loan.

Why don't I have a credit history?

If you've never borrowed money before, it's possible that you don't have a credit history. As a result, it’s likely that many people who have never had any financial responsibilities including, for example, a mobile phone contract in their name, will not have a credit history - or at least not enough credit history to prove to the lender that they can borrow money and repay it.

You may also not have opened a bank account - this is important, as a bank account can prove to a potential lender that you can manage money responsibly, too. Additionally, you might not be on the electoral roll - you're not registered to vote, in other words - so your address is unknown.

You may think that no history is better than a bad history, but in some ways it’s even worse because you are an unknown quantity and lenders may feel it’s better to be safe than sorry, so they could decide not to lend you money.

Less problematic than either of these but still not great as far as a lender is concerned, is someone with a so-called ‘thin history’. This could be an older person with a mortgage but who, otherwise, borrows very little. As a result, the bank has less information about them on which to base its lending judgement, so it might charge a higher interest rate to be on the safe side.

How do I get a credit history?

Building up a credit history requires a little time and patience, so if you are looking to finance a new car, you may have to wait a while longer.

First, make sure you’re on the electoral roll - this lets lenders know that you have a permanent address. It helps if you’ve been a resident there for longer than a year, too.

Open a bank account and manage it responsibly by paying bills on time, and setting up direct debits for energy bills and insurance bills. Consider taking out small amounts of credit to demonstrate your ability to responsibly manage credit and repay debts. Ensure the full balance is paid off each month to avoid being charged interest.

Try not to use your overdraft if you can avoid it, but if you do have to, make sure you settle the balance before any charges kick in. Avoid exposing yourself to someone else’s poor credit record, too. For example, close any joint accounts with a former partner who has a low credit score, and avoid starting new arrangements with anyone else who doesn't have the best rating. Their poor credit record will affect yours.

What other ways can I build up a credit history?

Where several finance offers are available on the same car, you may have to put down a minimum deposit to secure an interest-free credit option or stick to a shorter contract. You may also need to focus on a Hire Purchase plan rather than PCP finance. This could be a way to get approved for affordable finance on the car you want and improve your credit score.

Part of the reason for this is that Hire Purchase is set up so you pay higher monthly payments than with PCP but automatically own the car at the end of the contract. As a result, you may have to pay a little more per month, but you're less of a risk to lenders, as you're paying off the debt more quickly than you would be with PCP.

Consequently, being open to Hire Purchase rather than just PCP could make the difference between being approved and not. Make the payments for this on time and you'll build up your credit history.

What can slow down the rate that my credit score improves?

Poor management of your financial affairs can limit your credit score, but also the existence of old bank or credit cards and bank accounts you’re no longer using. Close them as soon as possible because lenders will take them into account when calculating the total amount of unutilised credit available to you.

Also, take advantage of your right to see your credit history to make sure that it contains no errors or misunderstandings. If you spot any, notify the credit reference agency immediately. The agency will mark it as being disputed and have 28 days to remove the disputed element or explain why it believes it should stay. Also, speak to the lender who gave the information to see if you can resolve it that way.

If necessary, you can add a ‘notice of correction’ to a piece of information on your history file that might, for example, update a lender on your present circumstances and paint a more positive picture.

After six months with a clean credit history, can I start borrowing?

Once you’ve got your credit history on track, showing you can handle credit and manage your financial affairs, this should make a big impact. Be careful, though, as you can blow it by applying for a loan you can't afford to repay or even by making multiple approaches to lenders.

On this last point, lenders make a distinction between what they call ‘hard’ and ‘soft’ credit searches. Soft searches occur when you request a quotation from a lender in order to find out what credit, and at what interest rate, might be available to you before making a full application. Typically this happens when you visit a comparison website for a better deal on a mortgage, a credit card or a personal loan. Only you and the website that helped you know about this soft credit search and it doesn't appear on your credit history.

However, a hard search, when you make a formal application with a lender for a loan, does. You may simply be trying to find out if you would be accepted before, if necessary, moving onto a new lender. However, these applications go into your credit history where they are seen by other lenders who then think you are making multiple applications for credit - implying that you could be desperate for money and in a poor financial state - or even that a fraudster has your personal details.

Carrying out multiple hard searches is the one time when shopping around is not such a good idea. If you have to, leave up to two weeks between applications and if you are declined for a loan, ask the lender why so you can try to resolve the situation.

Find the best loan for your needs with soft searches, though, and at this stage you should be able to apply and start borrowing.


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