Are you pondering over the question, “Can car finance boost my credit score?”
Many people are unsure about the impact of car finance on their credit score. The truth is, car finance can influence your credit rating. However, if you manage your repayments diligently, you’ll likely see an improvement in your credit score over time.
When you purchase a new car, the thrill of driving it home can overshadow the reality of the financial commitment you’ve just made. However, once the initial excitement fades, it’s crucial to focus on managing your finances effectively. Ensuring that your car finance repayments are made on time each month is key.
Late payments will negatively affect your credit rating and lower your credit score. A poor credit score can make it more challenging to secure other loans and mortgages in the future. So, how does car finance impact your credit rating? Let’s take a look.
How Does Car Finance Influence My Credit Score?
Car finance can affect your credit rating in two ways.
First, your application results in a “hard check” on your credit report. This can temporarily reduce your credit score by a few points. However, there’s no need for alarm as this effect is short-lived.
Second, the car finance agreement becomes a part of your credit history. If you consistently make your payments on time throughout the loan period, this will positively impact your credit record. It shows other lenders that you can manage your finances in a responsible way.
While it is always prudent to keep your borrowing to a minimum, you do need to have some credit facilities to enable you to successfully apply for other cards or loans in the future. Lenders look at your payment history as a measure of your budgeting and financial management.
But it is surprisingly difficult to get a mortgage with no credit history. Without this track record you will have a thin credit profile and lenders will struggle to assess you.
Most people have some type of credit agreement or loan. If well managed these can contribute towards a positive credit score. But debt payments will also affect the affordability calculations when you apply for a mortgage. These are done by the lender, and a very basic one is called a Debt to Income ratio, or DTI. This works out the percentage of your gross income that is committed to debt repayments. If it’s too high you may not be able to go to one of the high street lenders.
The Impact of Car Finance on a Credit Report
When you opt for car finance, you should expect some changes to your credit score and credit report.
A car loan is typically reported as an instalment account, much like a mortgage or student loan. This means you make fixed repayments every month for a set term.
Your credit score is calculated using a “credit mix,” so your car finance can actually enhance your credit rating, especially if you’ve settled other instalment loans and the car finance loan is the only one you’re servicing.
Making your car finance repayments on time will demonstrate to lenders that you’re a reliable borrower. If there’s ever an error on your record, such as a payment being posted as late, you can dispute it and have it corrected, to avoid damage to your credit record.
Tips for Car Finance Shopping
Your car finance applications will also be recorded as credit enquiries. Financial institutions make these enquiries when you apply for credit, which can cause a slight dip in your credit score.
Generally, this shouldn’t cause concern. If you do this within a 30-day window, the hard enquiries will be counted as one when calculating your credit score. However, it’s advisable not to apply to many different companies in a short space of time.
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What If My Application is Turned Down?
If your finance application is declined, it’s not advisable to rush straight into applying with another lender. This could further harm your credit rating due to the additional hard checks on your credit report.
Instead, take the time to understand why your application was rejected. You can ask the lender for an explanation. Once you understand the reasons, you can avoid repeating the same mistakes in your next application.
You can also research car finance deals without formally applying. This can be done by reading about the application process for car financing from various lenders. If you have any queries, reach out to their customer service teams. They can provide you with information about the requirements and other crucial details to ensure a successful application.
Car finance is not just a means to drive away in a new car, but comes with an added opportunity to enhance your credit rating.
This will only happen if your monthly payments are made on time.
By doing this you demonstrate to future lenders your reliability and creditworthiness, which will positively impact your credit score over time.
The application process itself can temporarily lower your credit score due to the hard check involved. But this is a short-term effect and can be offset by the long-term benefits of maintaining a good repayment record.
Shopping around to find the best deal is always a good idea. But remember not to make a full application to more than one loan company.
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