One of the most common questions people ask when it comes to getting a car on finance is ‘will car finance harm my credit score?’ Credit scores are really important when it comes to getting a car on finance. When buying a car, lenders use a credit check to see if you have a credit history and how you’ve handled credit in the past. There are a number of ways in which car finance could harm your credit score but not if you’re smart about it. The guide below explores how credit scores affect car finance and how to avoid negatively impacting your score.
Why is credit score important for car finance?
Most car finance lenders will want to know what finance you have, past credit and how you manage credit. Your credit report can show your history of repayments and how many credit accounts you have. A history of meeting repayments on time and in full can help to increase your credit score. Those who have missed payments or made late repayments may find themselves with a low credit score. This increases the risk for potential lenders as you are more likely to default on your finance again. The best car finance rates can also be reserved for those with good credit so you could end up paying more than you need to with bad credit.
Applying for car finance
When you apply for car finance, most lenders will require a credit check on your credit file. There are two types of credit check which can be performed. A soft search credit check only gives lenders access to some of the information on your credit report, doesn’t harm your credit score and won’t be listed on your credit file. However, some lenders may require a hard search to be done. A hard search will be listed on your credit file, can negatively impact your credit score, and allows full access to your credit report. Making multiple applications for finance with hard searches in a short space of time can have a detrimental effect to your credit score. Where possible, you should try to stick to soft search credit checks only.
Paying back your car finance deal
It’s a common misconception that getting a car on finance will harm your credit score. Your credit score could only be affected by finance if you fail to stick to the terms of your agreement. If you miss payments or default on your loan, it can have a serious effect on your credit score and if the loan is secured, the lender can take the car off you. If you make all your payments on time and in full, along with any other financial commitments you may have, car finance can actually be used to help improve your credit score!
After car finance ends
Once your car finance agreement has ended, your credit could have improved or declined. Depending on how you have chosen to pay back your loan or not, your credit score can determine your next options. If your score has improved, you can be in a better position to get easier acceptances and lower interest rates, meaning you can get a better deal. If you have allowed yourself to fall back on payments, your credit may be in a worse position than when you started. If this is the case, its recommended that you look to improve your credit score before you think about getting finance again.
Ways to improve your credit score before car finance application
– Check your credit report.
The first thing you should do before you apply for any form of credit or finance is check your credit report. If you have a low score, it can be a good indicator of what’s holding you back. You should also check that all your information is accurate and up to date. Having misinformation on your credit file can negatively impact your score and it makes it hard for lenders to verify the information on your application.
– Make payments on time
Showing evidence that you can be trusted to make payments on time and in full is really important to increasing your credit score. Credit scores are all about predicting future behaviour and showing good financial habits can help to put you in a better position. If you’re struggling to meet any of your payments, you should never miss a payment and instead speak to your lender to see how they can help.
– Reduce any existing debt
Another factor that affects your credit score is how much credit you currently have and how you keep on top of it. Having high levels of existing debt can put lenders off as they may think you can’t afford to take on anymore. Where possible, you should try to reduce some of your existing debt first before applying for anymore. Not only will it increase your chances of approval but also make credit more manageable.
– Apply for smaller loans
If you are applying for car finance, you should only ever apply for car finance that you know you can afford to pay back. Opting for a smaller loan or cheaper car can be easier to pay back and more affordable. You can reduce your loan amount by having a deposit to put down too but if you need a car in a hurry, you can benefit from 0 deposit car finance deals too. If you get a loan which you can’t pay back, you could end up with more serious financial consequences.
– Build a credit history
Many people assume that having no credit history will mean they have a good credit score. However, if you’ve never taken out finance in the past, lenders can’t predict what type of borrower you will be. You could consider getting a mobile phone contract in your name and paying it every month or use a credit building credit card to make small purchases on each month and paying them back in full.
