It’s a common misconception that getting a car on finance negatively impacts your credit score but that doesn’t have to be the case. There are a few reasons why your car finance deal would affect your credit score. But you can also use your car loan to help to rebuild your credit score.
What is a credit score?
Your credit score is a piece of numerical data which can be found on your credit file. Your credit score is calculated by your personal information, financial history, credit enquiries and public records. You can check your credit score by using a credit referencing agency such as Credit Karma. Finance lenders will usually perform a credit check to determine your credit worthiness. Generally, your credit score is better if you have strong evidence of meeting repayment deadlines, a long credit history and accurate information on your credit file.
Your credit score is important as it increases your chances of getting approved for a range of loans, credit cards and finance. It also gives you access to better finance rates, higher credit limits and better deals overall.
How does your credit score affect car finance?
Car loan lenders will usually perform a soft search credit check when you apply for finance. A soft search credit check enables potential lenders to take a quick look at your credit fil and determine whether you can be trusted to pay back your loan before you are accepted. It can also help lenders to set the offered interest rate. A soft search credit check does not affect your credit score and isn’t recorded on your credit file.
Does car finance negatively impact your credit score?
As mentioned, when you apply for car finance you should try to stick to soft search applications only. However, some finance lenders will require you to pass a hard check credit search first. Making multiple hard searches for finance with different lenders can negatively impact your credit score. Hard searches are recorded on your credit file and can indicate to lenders that you are desperate for credit.
Car finance can also harm your credit score if you do not keep up with your car finance payments. In car finance agreements such as Hire Purchase car finance, the loan is secured against the car. This means if you fail to meet your repayment schedule, the lender has the right to take the car away from you.
Missing payments for car finance can also lead to defaults. Defaults are when a lender decides to close your accounts because you’ve missed payments. They can stay on your credit file for 6 years and can seriously affect your chances of getting accepted for finance in the future. Remember, you should never borrow more than you can afford to pay back.
Can car finance increase your credit score?
People who apply for a car loan with bad credit can use their car finance deal to increase their credit score. However, the impact that it has is completely down to you. By meeting your repayment deadline each month and always making all your repayments on time and in full can help to raise your credit score. Some applicants then choose to refinance a car loan when they are halfway through their credit agreement. At this point, with your newly improved credit score, you could be offered a better rate and lower your monthly payments. Its worth noting that car finance can only increase your credit score if you aren’t missing any other payments too. You should make sure that any money you owe is paid back on time.