If you currently have a low credit score or no previous history of borrowing, you may be wondering what effect taking out a car loan would have on your score. This is very common and there are many misconceptions around how car finance can affect your current score. The guide below looks at the ways in which your credit could be impacted but also top tips on how you could protect your credit throughout the process.
What is a credit check?
A credit check can be performed on your report when you apply for any sort of loan, finance, credit or contract. A lender will ask permission to run a credit check against you when you apply for finance to see which type of borrower you are. A lender gets access to your credit file and can see all your personal information, payment history and the number of active credit accounts you have. Based on your information, they can decide whether they want to offer you finance or not. Applicants who have a long history of meeting payments on time, have low levels of debt and only use credit little often tend to get access to the best deals. If you’ve struggled with meeting deadlines in the past, lenders may be worried that you are more likely to default on future loans too and could decline your application.
How is your credit score affected when applying for car finance?
When you’re searching around for car finance, it can be tempting to apply with multiple finance lenders at the same time. Making multiple applications for finance in a short space of time can have a negative impact on your credit score. It can also indicate to lenders that you keep getting refused elsewhere and are desperate for credit. Hard searches on your credit file are recorded on your file and can harm your score when you make lots of hard searches at once. To avoid a credit impact, you could instead consider using a car finance broker or sticking to a soft search credit check for car finance instead. If you’re unsure, it can be a good idea to ask the lender which type of credit check they perform when you apply online.
Can my credit be harmed when I get approved for finance?
If you’ve applied online with a car finance company and have received an approval with the lender, you may need to have a final credit check performed to help secure the deal. Usually, you can use soft searches to check your eligibility but many lenders may want to do a final hard search on your credit check before they payout the car loan. A single hard search on your credit file may drop your score by a few points but it shouldn’t have a dramatic impact on your credit.
How to use your car finance deal to improve your credit score?
Once, you have a car finance deal in place and you’ve signed the agreement, you will start to make monthly payments until the end of the agreed term. Having a car finance deal in place can be used to increase your credit score by meeting each payment on time and in full. Being able to stick to the rules of your agreement can show evidence of responsible borrowing and if you keep on top of all your financial commitments, you should see your credit score excel!
The only way a car finance agreement could hinder your credit score once you start making repayment is if you fail to repay or make late payments to the lender. Missed or late payments have a detrimental impact to your credit and can lead to more serious financial implications such as defaults on your credit file, Country Court Judgements or even bankruptcy.
How to protect your score when getting a car on finance:
If you’re worried about the impact that car finance with has on an already low credit score, there are ways in which you help to protect your score.
- Reduce the number of applications made in a short space of time.
- Use car finance broker to help you find the best deal and reduce the need for multiple applications.
- Stick to soft search credit checks only.
- Meet all your financial payments on time and in full.
- Reduce any existing debt before you take on any more finance.
