Does car finance affect credit score?

Roman Danaev

28 June 2022

To get a good deal on car financing, you need a good credit score. But what happens to it after you take out a loan?

When you first take out any kind of hefty loan, you generally see a slight drop in your credit rating. But if you make your payments on time, the dip will only be temporary. There are other nuances that can move your credit score, either way, so make sure to read till the end.

What is a credit score?

A credit score is a three-digit number that measures how reliable a person is at borrowing and repaying money. It helps lenders (banks, financing companies, etc.) decide whether it’s worth giving someone a loan.

A credit rating holds data about a person’s financial history and is calculated based on. It is assigned by three credit reference agencies in the UK - Experian, Equifax and TransUnion. Each agency has a slightly different calculation system. For example, an Experian excellent score is 961 to 999, Equifax - 466 to 700, and TransUnion - 628 to 710.

Does applying for car financing affect your credit score?

The application itself has no effect on your score. The later stage - the car loan preapproval - can trigger a hard credit inquiry, which we will talk about soon.

This doesn’t happen with every application, so you may be able to shop around and send applications without impacting your credit. This way, you’ll see how much you can borrow, how long for, and get quotes from finance providers.

But the possibility of an inquiry is something to keep in mind.

How car finance affects credit in a positive and negative way

Let’s say a few lenders denied your application. You move on to another provider, who will look at the history of loan applications and wonder why you’ve applied so many times. They might consider it as a sign that you’re an unreliable borrower.

Or it can go the other way. If you’ve successfully applied for car loans and repaired them, future lenders will see it as a good sign. Besides, paid-off loans are some of the biggest factors that improve credit ratings.

Applying for a car loan

First, you need to select the appropriate car finance provider or use an aggregator that does it for you. Then, you need to select the terms - the amount to borrow, the length of the contract, and choose the estimated payment plan. The application itself can usually be filed online.

It’s beneficial to minimise the number of applications you file (to appear more reliable). So, apply for your preferred deal first and, if unsuccessful, make your way down the shortlist.

Hard vs Soft checks

A soft credit check - or a soft inquiry - implies looking at some of the information on your credit report. It gives a top-level view of your financial history and helps providers pre-approve any offers. Soft checks don’t affect your credit score or go deep into your credit history, which is why you can also see these deals described as no credit check car finance.

A hard credit check - or a hard inquiry - involves pulling your entire credit report. It is a more thorough background check. And since they affect your credit history, only you can authorise them.

The effect of hard credit checks

Hard checks can lower your credit score by a few points. They can also stay on your credit report for two years, reduce your chances of getting approved for loans for around six months, or result in a higher interest rate. Lenders don’t want to see too many hard checks in a short amount of time since they make borrowers look desperate for money.

Repaying the car finance

As you can already tell, repayments can determine whether you will be able to build up a good credit rating or make it go down.

  • If you make regular car payments, you will not only see an increase in your rating, but you will also ensure evidence of repayment in your credit history. This will make you more eligible for other loans and help you lock in favourable interest rates.
  • If you default, it will lower your rating, and the record of it will stay in your credit history for up to six years. This will hamper your chances of future borrowing.

What impacts my credit score?

Your credit score is based on your:

  • Payment history and its length
  • Credit mix
  • Credit limits
  • Voting status
  • Previous, current, and joint credit accounts
  • Record of current and past credit commitments
  • Bankruptcies or other court judgements

Factors like occupants at your home address, your friends and family, distant credit history, and the number of times you check your history doesn’t affect your credit.

Final words: Does car finance build credit?

To conclude, yes, financing does affect your credit score. And no, the fact of taking out a loan does not build credit. But as long as you stick to your monthly payment schedule, your credit will recover. What’s more, it will help build your track record, making you even more reliable and creditworthy than before.

If you feel that this arrangement will work well for you, have Carplus as your trusted partner. With our tool, you can easily compare auto loans and select those with attractive interest rates and flexible terms. Get a quote today and get one step closer to the car you’ve always wanted!

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