Get your hands on a Carmoola Gift Box Learn More

Close-vector

Will Getting Car Finance Improve My Credit Rating?

Maybe you're not sure how it might affect your credit rating if you apply for car finance? 🤔 If you’re worried about it, you may be asking, will car finance improve my credit rating or damage it? The truth about car finance is that it may affect your score, but as long as you pay on time every month, you can expect that your credit rating will eventually improve as a result. 

Buying a new car gives you a feeling of excitement, and you may not be thinking about your payments just yet. After all, it’s time to celebrate because you’re driving your new ride home. But after all the celebrations, you need to start thinking and planning your finances carefully. It’s crucial that you make on-time payments for your monthly car finance repayments. 

If you’re careless about your payments, it can definitely put a dent in your credit rating. And as you may already know, a bad credit score means you may encounter difficulties in securing other loans in the future. So, how exactly does car finance affect your credit rating?

Will Financing My Car Change My Credit Score?

Getting car finance can affect your credit rating in two ways. Firstly, your application will add a "hard check" enquiry into your credit report. Hard checks can knock off a few points from your score, but don’t worry because this is only temporary. 

Secondly, car financing becomes added to your credit history. This will have a positive impact on your record as long as you make on-time payments each time for the whole duration of your loan period. As you can see, the importance of paying on time is the determining factor in whether car finance will affect your credit rating negatively or positively. 

What Car Finance Does to My Credit Report

If you’re planning to apply for car finance, expect that there will be changes to both your credit score and credit report. When looking into your credit report after you get car financing, you may even find all the new data to be overwhelming. Check two categories found on your credit report, “type of accounts” and “current status.”

With the "type of accounts", car financing is usually reported on your record as an instalment account. Mortgage and your student loan are also instalment accounts. What this means is that you make repayments for these loans every month with the same amount. You will keep on paying the same amount monthly for a fixed term. 

Your credit score is calculated from what’s called the “credit mix”, so your car finance can actually help you improve your credit rating, given that you’ve paid off other instalment loans and the car finance loan is the only one you’re paying for. 

As for the "current status", if you’ve been paying on time for your car finance repayments, you will see in your credit report that your loan is “paid as agreed” or “current.” Your payment history is a huge factor that influences your credit score. 

It’s highly important that you stay current with your repayments because it will definitely benefit your credit rating tremendously. If you ever fall behind for 30 days or more, then you should prepare yourself for the possibility of the lender repossessing your car and your credit being damaged.

Making your car finance repayments on time will reflect on your credit report that you’re a good payer. If there’s ever an error on your record, such as a payment being posted as late, you can file a dispute so that it can be corrected and you can avoid damage to your credit record. Keep in mind that free copies of your credit report are available to you every 12 months. Make sure that all accounts you have are correctly reported. 

Tips on Car Finance Shopping

Your car financing applications will also be recorded in credit enquiries. Financial institutions make inquiries when you apply for car financing, so expect to lose some points on your credit score. You can group your applications together so that they will count as one. 

Shopping for various car financing deals means that you allow lenders to run credit checks. Those will leave hard enquiries on your credit report. Generally, this is nothing to worry about. If you do this within 30 days, the hard enquiries will be counted as one when your credit score will be calculated. Nevertheless, it’s best to be on the safe side, so don’t take too long when shopping for car finance deals. 

What to Do If My Application is Declined?

If your car finance application is declined or rejected, don’t apply to another lender immediately. This will do more harm to your credit rating because of the hard checks that will be posted on your credit report. 

What you can do instead is to learn as much as you can as to why your application for car finance was rejected in the first place. You can ask the lender, and they will explain to you why they declined your application. Once you have an idea, take note of it so that the next time you apply, you can avoid any mistakes you’ve made previously. 

You can also enquire about car finance deals without necessarily applying. You can do this by reading about how to apply for car financing from a particular lender. If you have questions, contact their customer service so that they can help you with your enquiries. Ask about the requirements and other important details you’ll need for your application to push through successfully. 

Check Out Carmoola!

Carmoola is making car financing an easy process for UK car buyers. Have a look at our car finance deals and see what fits your financial situation best. Check out our new, no-hassle approach to paying for your car. 

Simply download Carmoola to apply within the app. We process everything online, it's simple with just a few personal details and ID. So you can expect it to be fast, convenient, and stress-free.

You'll get a decision within minutes! You can also learn more about car financing on our blog. Be sure to check back often to get up to date tips on how you can buy a car with car finance!

We’d love to hear your thoughts on this article!

Comments