If you apply for car finance, it will usually have an impact on your credit score.
This happens whenever you take out a loan. Whether it will improve your score or not depends on whether you stick to your payments, so here’s what you need to know.
Making Car Finance Enquiries
Every time you apply for a car loan and a lender reviews your credit report, this will have an effect on your credit score.
Some lenders also carry out soft checks to give them an idea about whether they will be able to provide you with finance without hurting your score.
In general, it’s a good idea to avoid applying for lots of credit in a short period of time.
For example, applying for lots of credit cards over the space of a few weeks can hurt your score.
With car finance, sometimes multiple checks for a loan are considered as a single check. If you have multiple enquiries over a period of 14 days, for example, these may be counted as a single enquiry because it is obvious that people will be looking at multiple lenders to find the best deal – minimising the impact on your credit score.
A hard check, which they will normally do later on to make their decision, will impact your score.
Making Your Payments
Once you have taken out a loan, you will need to start making your payments every month. This may continue for a few years depending on the agreement.
This is a really important part. If you are careful to make your repayments every month, this will help you to build up a good credit score.
Whenever you take out a loan and pay off the amount due, you are helping to improve your score.
So in this sense, car finance does help to improve your credit score because you are showing that you are a responsible lender who can repay the debt you owe.
What If You Miss a Payment?
If you miss a payment, the opposite is true – and this can hurt your credit score.
If you just make one late payment, and you then continue to meet all of the remaining payments, the effect may not be too severe.
But the aim is always to make your payments on time every month.
Check Your Credit Report
You may also want to check your own credit report, and you can do this for free at Experian, Equifax or TransUnion. If you see an error, such as a payment that you made on time showing up as late, then you may want to dispute this.
Car Finance Can Help to Improve Your Credit Score
Taking out car finance can be a good way to improve your credit score. This is particularly true if you don’t have much credit history. Taking out a car loan and paying it back on time every month can help to show that you are a responsible borrower.
Just remember to make all your payments on time if you want to improve your score.