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7 Ways Car Finance Can Improve Your Credit Score

Sailun Tires

Cruising the roads in a brand-new car is thrilling. You’ve got everything from the latest mod-cons to the beautiful fresh motor smell. But to get there, like most motorists, you likely had to take out car finance.

But can car finance ultimately improve your credit score? Well, that is mostly up to you. Your credit score is impacted by how you borrow money and make your payments on time. How “creditworthy” you are will either make you more attractive to lenders or keep you out of the running.

Here we look at 7 ways car finance can improve your credit score: 

Builds good payment habits

One of the most essential parts of having any type of loan is making all your payments on time. And the beauty of a car finance deal, whether that is a hire purchase, lease or personal contract purchase, is that you will know exactly how much you are expected to pay each month before you sign on the dotted line.

Keeping on top of all your payments will instantly boost your credit score and help you to get better, more affordable deals in the future.

Highlights your spending habits

Your credit score relies on many things, but making your payments on time and not spending above your means will instantly improve your rating.

So how can you monitor your spending habits effectively? 

The simple answer, make a budget. Figure out how much your weekly or monthly outgoings are compared to your incoming balance. Look at how much you spend on rent/mortgage, utilities, food and entertainment, as well as how much you spend on the running costs of your vehicle.

Makes you look at your personal information

If you’re applying for a car finance deal, you will need to look at all your personal information on your credit report to make sure everything is legit and make sure that no debts are mistakenly attributed to you. If this happens, you should promptly initiate a credit dispute by sending a debt validation letter. You can handle this yourself or seek the assistance of a credit repair expert to act on your behalf. Check out your current direct debits and contracts to ensure you are paying the correct amounts, and raise any red flags with your bank to ensure no fraudulent activity occurs.

While you’re at it, make sure all your information is up to date on your local electoral roll and that you are registered in the first place!

Rebuild your credit score

While it may have been years since you were bankrupt, had an IVA, CCJ or default on your account, lenders will be less willing to grant you a loan if it looks like you’ve had a shady past. Fortunately, car finance for bad credit is available from specialist lenders to help you rebuild your score and get on the motor market. 

They will look at your circumstances and tailor an affordable finance deal to meet your needs. Make sure you stick to your monthly payments and within your terms and conditions, and you’ll instantly improve your credit score.

Hard vs soft checks 

One of the surefire ways to damage your credit score is to apply for too many loans at once and have hard credit checks against your credit report. Knowing the difference between soft credit and hard credit checks will instantly keep your credit looking healthy:

  • Soft credit checks: This is a simple way for companies to link you to your credit information to see how successful your application would be without looking at your complete credit history. Soft credit checks are only visible to you and no outside parties.

  • Hard credit checks: This is where companies will run a complete search of your entire credit report, which is noted on your file, for others to see. If you make too many in a short time, this can reduce your chances of obtaining credit and negatively impact your credit score.

In short, avoid hard credit checks where possible. The more hard checks your report shows, the more red flags will appear for lenders. They are likely to assume that you are struggling financially and are less able to make your payments on time, landing you in the high-risk category.

Applications are more likely to be refused, or you’ll be offered higher interest rate packages as a result.

Ending an agreement early can be a positive 

Most car finance deals such as hire purchase, lease or personal contract purchases will let you end your agreement early if you have paid back at least 50% of your loan. 

You might need to terminate your contract early due to a change in employment or simply because you want a different car. While you’ll need to pay off any required final payments, many car finance deals will let you return the vehicle as long as it is in good condition and you have stuck to your mileage limits.

But what does this mean for your credit report? Voluntarily terminating your car finance agreement is the equivalent of settling and closing an account under normal circumstances. As a result, it’s not viewed as a negative.

Your overall credit score will benefit as long as you have made your payments in full and on time. While keeping the account open will have a greater positive effect, and you might notice a minimal decrease in your score after closing your account, it’s not as damaging as you might think.

Lenders like to share information 

Typically, most lenders share their customer’s credit accounts with a credit reference agency (CRA), but it’s not guaranteed. So, make sure you check out your credit report with the three main CRAs: Equifax, Experian and TransUnion, so you know what information your lenders have shared about you and where.

Lenders tend to update and share new information with CRAs monthly. It can take up to six weeks before your information appears. To ensure there are no hidden surprises on your credit report, check in with each CRA regularly.

Over time, maintaining a healthy credit account will boost your credit report and be used as credible evidence that you are a reliable borrower and payer.

Are you looking to boost your credit score with car finance? Stick to your agreed terms and make your payments on time, and you’ll have access to the best deals on the market.


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