Home Business Magazine Online
It’s a common car finance myth that car finance harms your credit score but the way you handle your credit is actually what affects your credit score the most. The credit scoring system is in place to make predictions about your future finance habits based on your previous behaviours. Your inability to make payments on time or racking up high levels of debt can drag your score down and make it harder for lenders to trust you in the future. With more drivers borrowing money from lenders to fund their next car purchase, you may be wondering if car finance is best for your credit score. Let’s take a look.
How influential are credit scores to finance lenders?
When you apply for any sort of credit or finance such as mortgages, car loans, mobile phone contracts or store cards and accounts, finance lenders will want to know how you handle your finances. Your credit score can be the perfect insight into how you handle your finance. Lenders like applicants who have a history of sticking to the rules of their agreements by paying back the money owed to the finance lenders on time and in full. Lenders also favour people who only use credit little and often and don’t rely on credit too heavily. Car finance lenders take a risk when they hand money out and the risk increases if the applicant has had trouble in the past with making payments.
How does applying for car finance affect your credit?
Before you can be considered for finance, you will need to make an application with the lender. Applications take key information from customers such as your personal details, how much you want to borrow and income and employment information. When you apply, lenders will then usually perform a credit check on your credit file. There are two types of credit search which could be performed on your file. A soft credit search for car finance is better as they aren’t recorded on your credit report, won’t harm your credit score, and only gives the lender a peak at your report.
A hard search credit check can negatively impact your credit score if you apply with multiple lenders who perform a hard search in a short space of time. It can indicate you are being refused car finance and applying with as many lenders as possible is bad for your score. A hard search also allows lenders to see your full credit report too and the outcome of all your applications for credit. If they see other lenders declining you for finance, it may also put them off too.
How to use car finance to improve your credit score:
It’s really simple to improve your credit score with car finance. As long as you meet each payment every month in full and on time until the end of the term, your credit score can reach new heights! At the same time though, you may need to assess any other financial commitments you owe and make sure all those payments are being met too. The best financial habits to improve your credit score include a healthy payment history, a mix of different credit accounts, low credit usage and good financial habits.
Can car finance negatively impact your credit?
When you first take out car finance, your credit score could take a small hit as it increases how much money you owe to lenders. However, once you start to repay on time and in full it should bounce back up. Just like any other credit agreement, your credit score can be negatively impacted if you don’t stick to the rules of the agreement. A car finance agreement is a legal document which you sign and agree to abide by the payment schedule. Missing your monthly payments or making late repayments can have a negative impact on your credit score.
In conclusion, getting car finance doesn’t have to have a negative impact on your score, unlike many popular car finance myths. As long as you keep on top of all your credit repayments, your credit score can improve. A better credit score can help to get a better deal when refinancing your car loan or taking out future finance.