We’re often asked if car finance will have an impact on a person’s credit score – and occasionally if car finance will actually improve someone’s credit rating. In actual fact, both these outcomes are possible – but it depends on how you apply and how you make your repayments.
Here, we’ll explore the subject in a little more detail – explaining how to avoid any negative impact on your credit score – and how you can use car finance to improve your credit history.
What is a credit score?
Everyone who lives in, or has had credit in the UK, has a credit score. There are different companies who provide these scores – known as credit referencing agencies – but the purpose is generally the same; to give lenders an indication of how risky it would be to provide you with a loan.
The better your history of repaying credit, the better your credit score is. However, since there are three main companies who provide these scores (Equifax, TransUnion, and Experian) – the actual numbers involved often don’t mean a great deal to anyone but the lenders who use them as a reference. For example, a score of 550 with TransUnion would be lower than average – but the same score with Equifax would be good.
A host of different things can have an effect on your credit – but there are two significant parts of having car finance that can alter your score; applications, and repayment conduct.
Does applying for a car loan affect your credit score?
The first thing you should be aware of are the checks that lenders do when you actually apply for finance.
Now, it’s important to understand what ‘apply for finance’ means – as there are two possibilities that lenders will offer.
In some cases, a finance company will offer to perform a ‘soft check’ on your finances. This kind of check is designed to give you a decision in principle, based on information you provide and a ‘footprint-free’ check on your credit file. This kind of check doesn’t have an impact on your credit score and lenders will not be able to see any record of it.
While soft checks do not show on or have an impact on your credit score, a full credit check that a lender carries out when you apply will.
Now, that’s not to say that applying for car finance will damage your credit rating – but applying a number of times might. For example, if you applied with Ford, then changed your mind; applied with Ferrari but were declined, then drove to Jaguar and made a third application, loan companies are likely to wonder why you’re making so many applications. Don’t forget, finance providers don’t like risk – and if there’s any reason for them to think you’re not a good prospect for paying your loan back, they will either refuse to provide credit – or offer a higher interest rate.
So, applying for car finance shouldn’t affect your credit rating – but if you do it numerous times, it might have a negative impact.
Does a car loan help your credit rating?
We now know what car finance applications can do to your credit rating – but what about actually getting and repaying a car finance agreement?
The truth is, the effect finance has will depend entirely on how you conduct your repayments. If you make every repayment on time, this will be seen as proof that you’re capable of repaying a loan in the way finance companies like.
On the other hand, if you miss payments; fall behind on your payment plan, or your lender is required to take further action against you – your credit rating can be severely damaged. As a result, you may find it harder to track down good interest rates in the future – or you could struggle to find a company that will offer you credit at all.
How fast will a car loan raise my credit score?
Unfortunately, repaying credit of any kind can take a while to turn into a positive result on your credit score. The credit referencing agency Experian report that information relating to payments can take up to three months to reach them – so it can take at least this long for a good repayment track record to start improving your credit history.