Keeping your financial well-being in check will undoubtedly mean questions along the way. This article explores the impact that taking out car finance has on your credit score.
The basics
Understanding credit scores factors
Credit scores are generated from your borrowing history and your general financial well-being. One of the best ways to maintain your score is by borrowing sensibly and paying back on time, and in full.
If you can maintain this regular payment for the lifetime of the loan then your finance will have a positive impact on your score. Improving Credit Score | Oodle Car Finance
Influencing credit scores
There are some things you don’t have direct control over when you are hoping to improve your credit score, but there are lots of things you can do straight away.
Get hold of a copy of your credit file and check all your details. If you find any mistakes you are entitled to have them corrected.
Make sure you sure you are on the electoral role (registered to vote) at your current address.
Pay your bills on time and in full each month. Lenders are looking for a strong track record of paying your bills. This is something that will take several months but is the back bone of a good score.
Lenders also want to see a credit being used wisely so don’t be tempted to max out your credit to the limits. Having unused credit is likely to have a positive impact on your score as it shows lenders that you are sensible with borrowing.
Importance of a healthy credit score
A credit score is not just used to determine the rates you are offered for borrowing. It can be used when you make an applications for insurance, monthly payment plans, jobs, and even to assess your ability to pay monthly rent'
Maintaining a healthy score will empower you to make to make sound financial decisions and encourage overall financial well-being, avoiding the stress that goes along with a poor credit history.
The average credit score in the UK, though you'll find some difference between agencies, is 700. It's helpful to know this average and set your financial goals in maintaining an above average score if you can.
Car finance and its impact on your credit score
Impact of timely payments
One of the most important and influential factors in your credit score is your payment history. If you miss your payment your finance provider will apply a temporary missed payment marker to your credit report. This can have a negative impact on your credit score. A single missed payment won’t be determined whether or not you will get credit in the future, but it will alert lenders that you are not 100% reliable.
If it remains a one-off and the rest of your report is in good shape, then you can expect your score to adjust back. Equally, the longer you go without paying, the worse it is for your score.
Monthly car payments and maintaining a good credit history
Car finance is probably one of the biggest financial commitments you will undertake outside of a mortgage and will include a sizeable monthly payment. Keeping up with those payments is essential in maintaining a healthy credit score. Borrowing within your limits to allow you to comfortably meet your regular car finance instalments is a good way to build a strong credit history.
Strategies for maintaining good credit with car finance
Financial planning for car loan payments
Car finance payments are likely to have a large impact on your budget. To make good financial decisions and avoid overstretching yourself you should always plan a loan commitment with care.
Let’s break down the various elements of your loan so you know what you’re signing up to.
Loan amount – the amount you want to borrow.
The loan term – the length of time you want to spread the loan over, usually months or years.
The interest rate – the annual interest rate that is applied to your loan based on your credit score and the lender. (See Interest rates and APR for more on this.)
Total interest – the sum of the interest you’ll have to pay spread out over the loan term.
Additional costs – these will include the cost of running the car, fuel, road tax, insurance, and regular servicing.
Any final payments at the end of the loan.
Any budgeting costs should include all these items. You should also make sure you have a back up fund in case your circumstances change unexpectedly.
Budgeting tips for timely payments
Access your financial situation by doing a comprehensive budgeting exercise using one of the many tools online: Budget Planner: how to manage your money - MoneySavingExpert
Work out a comfortable monthly amount considering each of the elements identified above, and stick to it.
Consider how much of a deposit you could put down which would reduce the loan amount and/or duration.
Set your payment date at the best time for you to ensure the funds are there.
Debunking myths about car finance and credit scores
It takes years to improve your credit score.
No, for the most part a few months of consistent payments on-time and in full will ensure your credit score remains healthy.
Checking your file will impact your score.
Not at all, you can check your score as many times as you like, and it won’t change your score. Equally companies can do a soft credit check before you accept finance, and it won’t affect your score.
I’ve never had credit so I must have a high score.
A good credit score needs a credit history. Without being able to demonstrate you can maintain payments over time you remain an unknown quantity and your score will reflect that.
Car finance negatively impacts credit.
Taking out car finance may temporarily reduce your credit score but if you pay on time and in full each month, it can have a positive impact on your credit score.
