Does Getting Car Finance Affect My Credit Score?
Understanding how your financial choices can impact your credit score is essential in today’s economy.
Like all types of borrowing, car finance can affect your credit rating both positively and negatively.
Whether you're planning to finance a car, currently have a car finance agreement, or are just curious about credit scores – read on to discover everything you need to know.
Understanding How Credit Scores Work
Credit scores give lenders an insight into your financial health. It shows them how you are currently managing your money and whether you have any debts.
In other words, they give lenders a snapshot of how likely you are to repay any debts you take on.
The main factors that impact your score include:
- Payment history
- Credit utilisation
- Length of credit history
- Types of credit accounts
- Recent credit enquiries
Each of these factors contributes to your overall score, especially your payment history and credit utilisation.
If you want to boost your credit score, it's essential to pay your bills on time and keep your credit card balances low.
A higher credit score means you'll likely enjoy lower interest rates, better insurance premiums, and favourable rental terms.
Does Car Financing Affect My Credit Score in the UK?
Securing car finance can affect your credit score both positively and negatively.
When you apply for car finance, lenders perform a hard credit check that will be recorded on your report.
While one hard check is unlikely to have any impact on your score, multiple checks could temporarily reduce your rating.
Once you have car finance, you can use it to improve your credit score over time.
Consistently making your monthly repayments demonstrates to lenders that you're a responsible borrower.
Another benefit is that financing a car diversifies the types of credit accounts in your report. Provided it is managed correctly, this shows lenders you can successfully manage multiple types of credit.
What's the Difference Between a Soft and Hard Credit Check?
Soft credit checks aren’t visible to other lenders. They help to determine your eligibility for finance without affecting your credit score.
Hard credit checks, on the other hand, give lenders a more in-depth look into your finances. They are recorded on your report and can have a negative impact on your score.
When looking for car finance, choose lenders that offer soft checks during the pre-approval stage. This can help you to avoid negatively impacting your score before finalising your application.
Can I Still Get Car Finance with Poor Credit Rating?
Having a poor credit rating doesn’t necessarily mean that you won’t be able to get car finance. However, it will impact the deals you are offered.
To get the best car finance rates, it helps to prepare for your application.
To improve your chances of getting a good deal when you have a poor credit rating, follow these steps:
Step 1: Apply to One Lender at a Time
To avoid negatively impacting your credit rating, limit how many lenders you apply to.
A full or hard credit check can stay on your credit history for up to 12 months. So, if your application is declined, give yourself time to work on improving your credit score before applying again.
Step 2: Get on The Electoral Register
Check if your name is included on the electoral register. You should be listed at the address where you currently reside. It’s simple enough, but it can improve your credit score.
Step 3: Set Up Direct Debits to Pay Bills
Setting up direct debits to pay your bills shows lenders you can make regular payments on time.
With direct debits, you won’t miss payments and you can create good proof of your capacity to pay.
Does Applying for Car Finance Affect My Credit Score?
Applying for car finance does affect your credit score. However, provided you don’t make too many applications at once, any negative impact will be temporary.
Once you enter a car finance agreement, making consistent payments can help boost your score in the long term.
At Carmoola, we carry out a preliminary soft credit check that won’t harm your credit rating. Learn how our car finance works before applying.
Read more about car finance and credit scores:
FAQ’s About How Getting Car Finance Affects Your Credit Score:
Does applying for car finance negatively affect my credit score?
Car finance can initially negatively impact your credit score. When you apply for car financing, a hard enquiry is carried out, which can temporarily lower your score. This minor setback can be offset by consistent, timely payments on your new loan.
Is there a way to check my credit score without any impact?
You can check your credit score for free, without it having any impact. You can use free apps such as ClearScore or go directly through companies like Equifax or Experian.
Does financing a car help improve or lower my credit score?
It can go both ways. Financing a car opens a door to improve your credit score through timely payments. However, miss a payment or two, and your score could take a hit. It's all about how responsibly you manage the loan.
How does a hard credit search influence my credit report?
A hard search shows up on your credit report and can cause a minor, short-term decrease in your score. It remains on your report for one year before it is removed.
What factors have an impact on credit scores?
Payment history, credit utilisation, length of credit history, types of credit in use, and the number of recent hard enquiries – these are all factors that have an impact on your credit score.
