Are you in the market for a new car? Looking to use finance to secure the deal? Worried about the affect it’ll have on your credit score? You’re not alone! In many cases, credit score and car finance go hand in hand. Not just through the application process but your credit score can be affected when you get a car finance deal too. Let’s look at how credit scores and car finance go together.
How Do Credit Scores Affect Car Finance?
Before you even apply for car finance, there are a few ways in which your credit score can be impactful.
Getting Accepted For Car Finance
A car finance lender will want to know the likelihood of you paying back your finance on time and in full. It can be hard to determine this when they’ve never met you. However, they often use a credit check to get an insight into how you’re handled your previous loans. A soft search credit check for car finance may be performed when you hit the apply button, but lenders will usually tell you if this is going to happen. The good news is a soft search won’t affect your credit score either. If you’ve got bad credit, you may find it harder to get an acceptance for a car loan. Missed payment, high levels of debt or lack of credit history can all lead to a bad credit score and put future lenders off.
Interest Rates
Car finance deals usually come with some form of interest to pay. Brand new cars could be offered with no interest to pay but they’re less common. Your credit score can affect the interest rate you are offered. Lenders take a risk when they give you money for a car and a bad credit score increases the risk. To help reduce the risk, lenders can offer higher interest rate on cars for people with bad credit. They reserve their best and most competitive deals for those who have excellent credit scores.
Does Getting Car Finance Harm Your Credit Score?
Once you’ve secured that sought after car finance deal, what happens to your credit score?
Initial Drop In Score
When you add a new credit agreement to your credit account, it will increase the amount of money you owe. This will affect your credit report, and you may see a temporary drop in credit score. Once you start making payments towards your car finance deal, your credit score should return to normal pretty quickly.
Improve Credit Rating
Having credit isn’t a bad thing but mishandling credit is. You can use your new car finance agreement to improve your credit score by making all your payments on time and in full. The lender will collect your payment on the same day every month via Direct Debit so make sure you have enough money in the bank before the payment is taken. Credit scores are all about future predictions so using this time to show lenders you can be trusted with your finances can improve your credit.
Missed Payments Can Damage Your Score
Car finance can be used to improve your credit rating but if you fall being on your payments, it can have a detrimental effect on your rating. Missing payments on your car finance deal can have a massive impact on your credit score. Missed or late repayments can stay on your credit report for up to 6 years so it’s important you can make each and every monthly payment on time.
Easy Ways To Improve Your Credit Score:
Improving your credit score takes time and effort but there are a few steps you can take towards improve your rating.
- Keep on top of all your payments and ensure they’re made on time.
- Build a small credit history if you don’t currently have one.
- Only use around 30% of your available credit at once.
- Have a good mix of different types of credit e.g. credit card, mobile phone contract, loan, car finance.
- Make sure the information on your credit report is up to date and fix any mistakes.
- Keep old accounts open.
- Check your credit report regularly for fraudulent activity.
- Register on the UK electoral roll to prove where you live.
