Does car finance affect your credit score?

Thinking about getting a car through finance can lead to a lot of important and potentially complex questions, like how it could impact your credit score.

Understanding how car finance affects your credit score is crucial before you sign on the dotted line. 

From how the application process impacts your score, to whether a car loan can improve it, we’re here to help. 

Let's clear up some of the confusion and get you up to speed on how car finance could affect your credit.

Got a specific question? Why not jump to:

• How will car finance affect my credit score?
• How long will a hard check affect my credit score?
• Does having car finance help my credit score?

How will car finance affect my credit score?

Taking out car finance can influence your credit score in several ways, with each stage of the process playing a different role. 

From the moment you apply to how you manage your repayments, let's explore how each phase of car finance can affect your credit score:

Application

When you apply for car finance, the lender will carry out a "hard search" which can cause a small, temporary dip in your credit score.

Don’t worry though, provided you aren’t making lots of applications in a short space of time, this slight drop won’t last long.

The outcome of the application won’t be recorded on your report. So even if you end up getting rejected, it won’t harm your score. 

It’s worth noting here that some lenders, like Carmoola, offer a pre-approval check when you get your budget. This is also known as a “soft search”, and it won’t show up on your report.

You can take advantage of these soft searches that are entirely harmless to your credit score to get an idea of whether you’ll be accepted before you apply. 

Payments

Here’s where having a car loan can really pay off. Making your car finance payments on time can help to boost your credit score over time, showing lenders you're reliable with repayments.

On the flip side, missing payments can hurt your score. So, make sure you can afford your loan before you sign on the dotted line.

Defaulting

If things go sideways and you can't keep up with your payments, defaulting on your car finance can have significant consequences. 

A default stays on your credit report for six years, making it harder to get credit in the future. 

It's a situation you'll want to avoid by reaching out to your lender if you're struggling to make payments. 

If you get in touch with them early enough, they may be able to work with you to find a solution that doesn't involve defaulting.

How long will a hard check affect my credit score?

Typically, a hard check may cause a small dip in your credit score, but the effect is thankfully temporary.

This dip usually lasts for a few months, though the inquiry itself will stay on your credit report for two years.

Don’t worry, the impact it has will reduce over time, so it shouldn’t cause any significant issues.

Does having car finance help my credit score?

Taking out car finance doesn’t just get you behind the wheel of a shiny new car - It's also an opportunity to build and improve your credit score.

While the idea of taking on more debt might seem counterintuitive, car finance, when managed wisely, can help more than you might think.

Here’s some other practical ways you can use car finance to boost your credit score:

Diversifying Credit

Car finance can help your credit score by diversifying the types of credit you have in your name.

Lenders like to see a mix of credit types, including instalment loans like car finance, because it suggests you can handle various credit responsibilities.

Adding a car loan to your credit portfolio can show lenders you're a well-rounded borrower.

Payment History

The most significant way car finance can help your credit score is through making consistent payments.

Since payment history is a major component of your credit score, staying on top of your car finance repayments can boost your score over time.

On the other hand, missing payments can harm your credit score. So, it's important to manage your car finance responsibly if you want to reap its score-boosting benefits.

As you can see, each step in the car finance process can influence your credit score - for better or for worse.

By staying informed and mindful of these factors, it can help drive your credit score in the right direction.