It is commonly known that car finance and the rate you receive can be affected by your credit score. A lower credit score can make it harder to get approved and also get you a higher interest rate if accepted. But how does car finance affect your credit, and does it have an impact when securing a car loan? The guide below looks at how car finance can affect your credit score throughout the car buying process and how to minimize the impact.
Does getting a car on finance harm your credit score?
Protecting your credit when applying for finance
When you apply for finance, lenders will usually run a credit check on you to see if you are eligible for finance. Making multiple finance applications with different lenders can be a great way to find the best deal but could harm your credit. Hard search credit applications can be recorded on your credit file and multiple applications in a short space of time can hurt your credit score. Making a soft search car finance application can help to reduce the impact of car finance on your credit score and won’t be recorded on your credit report either.
Your credit may take a hit when you take out car finance
When you’re accepted for finance and sign the contract, your credit agreement will start from the agreed date. Once your car finance agreement is in place, your credit score can take an initial hit and may be negatively impacted. This happens because the amount of debt you owe has increased. Once you start making your payments on time and in full each month, you should see your credit score return to its normal level.
Missed car finance payments harm your credit score
When you take out a car finance agreement, you are agreeing to stick to the rules of the contract. The contract will state you must pay the lender back on the agreed date each month and in full. Missing your car finance payments is one of the most harmful factors to your credit score. If it’s a secure loan, the lender can have the right to take the car off you and this seriously affects your ability to borrow in the future.
How to build good credit with car finance
Pay all your bills on time and in full
The best credit scores are formed by good financial habits. Paying your bills on time and in full is one of the easiest ways to improve your credit. You can show future lenders you can be trusted to handle finance responsibly by paying your car finance when it’s due. This also goes for any other form of credit you owe, not just your car finance agreement.
Have a good mix of credit
A healthy credit score shows a good mix of different forms of credit. Having different types of finance can show lenders that you can handle different finance accounts. You could consider having a range of credit such as a mobile phone contract, a mortgage, car finance, or a store card. Meeting all payment deadlines and keeping credit usage low can then help to boost your credit.
Reduce debt before car finance
Whilst a number of different credit accounts can be a good thing, it will harm your credit score if you owe a lot of money to lenders. Credit should only be used little and often, and you should never be solely dependent on credit or finance. Before you take on any more credit, such as car finance, it can be worth reducing any other finance or getting out of debt you owe first to make your finance more affordable.