How does buying a car affect your credit?

Buying a car on finance can impact your credit score positively or negatively depending on your individual circumstances and your actions throughout your loan term. Check out our comprehensive guide to find out more.

What is a credit score?

A credit score – also known as your credit rating – lets lenders know how risky it might be to lend money to you. It’s a three-digit number that’s used to represent what kind of borrower you might be and how likely it is that you’ll be able to manage your repayments.

What can affect your credit score?

There are many things that can affect your credit score. Every individual score is calculated differently and can change at any time. It’s not an exact science but factors that impact your score include how many different types of credit you have, your repayment history, the number of times you’ve applied for credit (hard searches), and the age of your credit. Most lenders will also consider what you do for work, how old you are, how much you earn, whether you’re a homeowner or not, and how much overall debt you have.

Find out more about improving your credit score over time with our complete guide.

How can you check your credit score?

It’s a good idea to check your credit score with each of the UK’s three credit reference agencies. Experian, CreditKarma (using TransUnion data), and ClearScore (who use Equifax) all let you check your score for free. They’ll also let you know whether that score is considered good, fair, bad, or excellent. Look over your credit report and double-check that all the details are correct; you can challenge any mistakes with the credit reference agency directly.

Will applying for car finance affect your credit score?

When you apply for car finance with CarFinance 247, we’ll run a soft credit check to see if we can find you an approval from our panel of lenders. This won’t have any impact on your credit score. However, if you choose to proceed with a finance option, the lender will carry out a hard search on your credit file. You might want to avoid making several applications for finance at once as having a lot of hard searches on your file at the same time can harm your score.

Could buying a car improve your credit?

If you buy a car on finance and keep up with your repayments, you could end up improving your credit score over time. Initially, you might see a slight decrease as you’re taking on a large new debt, but it should recover quickly once you’ve start paying the loan back. Making all your payments on time and completing your finance agreement without missing a payment proves that you can be a responsible borrower and reduces the risk for lenders considering issuing you a loan in the future.

Car finance could also improve your score by diversifying your credit mix. Lenders like to see a mixture of different credit types on your report such as a mortgage, credit card, and mobile phone plane because it reassures them that you’re a responsible and experienced borrower.

Could buying a car damage your credit?

In contrast, if you’re unable to keep up with your repayments or regularly pay them late then your car finance loan could negatively impact your credit score. Missing more than one payment, defaulting on the loan, or no longer being able to afford it are all signs that you might not be a responsible borrower. That’s why it’s important to consider your affordability over time at the start of your loan and consider refinancing if you need to reduce your monthly repayments.