Does Car Finance Help Your Credit Score?

Does Car Finance Help Your Credit Score?

If you’re about to take out car finance it’s worth knowing that it can affect your credit score. Credit ratings play a big part in our financial lives. They help us to get good deals on mortgages and loans, so does car finance affect credit scores for good or bad?   

Like any borrowing, if you pay back on time, car finance will help your credit score. If you miss payments or pay late, it will negatively affect your credit score. To find out how we explain how the credit scores work in this article.  

What is a credit score?

A credit score, sometimes called a credit rating, is a numerical figure between 0 and 999. It helps finance companies decide whether or not to lend to you. A high number indicates you’re a reliable payer and a lower one that you may have missed some repayments.  

Missed payments are reported to credit reference agencies; Experian, Equifax, and TransUnion, and your credit score falls as a result. The agencies all use different scoring methods, though. This makes it quite confusing as your rating might be different with all three.

So how exactly does car finance impact credit score?

What are hard and soft credit checks?

There are two different types of credit checks, hard and soft. The former is a more in-depth check that looks at everything on your file, all borrowing, bank accounts and other financial markers noted.

Every hard credit check performed is also noted on your credit report, meaning that applying for too many lines of credit, e.g. car finance, credit cards etc, in a short period of time will negatively affect your score.

Soft credit checks only take a glance around your credit history and are often used to give an agreement in principle, something used to give a ‘conditional’ offer of lending, often done at the very start of the application process.  

How car finance can affect your credit score  

Car finance can positively and negatively influence your credit score, typically at two stages – application and repayment.

Application stage 


If you apply too many times in a short period, lenders carry out ‘hard’ checks on your credit file. This could damage your credit score unless they’re treated as one inquiry. It’s a good idea to ask whether a ‘soft search’ can be carried out at the application stage - this is a limited check that doesn’t affect your credit score. It can give you an idea of whether the application will be accepted.


If your application is successful, your credit score may still fall a little but this will only be temporary. As time goes on, and you make your repayments in full, you can considerably build up your credit score.

Repayment stage


If you miss any repayments, pay late, or pay less than you’re supposed to, it harms your credit score significantly. This is because you haven’t kept to the terms and conditions of the finance contract.


Car finance boosts your credit score if you make all your repayments on time and in full. But this means it’s important to be 100% confident that you can ensure that the repayments are affordable for the whole finance term. Regular repayments show that you can manage your money and that you aren’t a credit risk to lenders.

Car finance companies and other lenders will always focus on the risk of not being paid. Your credit score gives them a strong insight into whether this might happen. Your previous payment history is the biggest indicator.   

A low credit rating can make it hard to obtain finance in the future. Even if you are offered loans with a poor credit score, you won’t get access to the best deals and it’ll cost you more in interest.  

Does applying for a car loan affect credit score?

Applying for a car loan doesn’t affect your credit score if the lender does a ‘soft-check’ on your credit file. This means they only look at certain pieces of information in your credit record and the search isn’t visible to other lenders.  

If you make numerous applications for car finance within a short period, though, it could negatively affect your rating. This is because too many applications suggest that you’re urgently in need of money. 

Does Buying a Car on Finance Improve Your Credit Score?

Positive effects on credit when you buy a car

Buying a car positively impacts your credit when you meet all the instalments. It shows financial responsibility to repay a loan as set out in the contract. It can give you access to better loan and mortgage deals in the future.  

Adding a different type of borrowing to your credit file can also boost your credit score as lenders see you’re dealing with a range of different credit and finance agreements. For example, paying off your car loan alongside credit card or store card balances.   

Credit cards are known as ‘revolving credit’ but car finance is ‘instalment’ credit as you pay a fixed sum each month as part of an instalment plan. Buying a car using finance strengthens your credit rating by showing you can repay consistently over a long period of time.

How quickly will car finance improve your credit score?

Because your credit score is a value of your reliability over time, any new lines of credit will take a little while to positively affect your credit score.  

Some people find as little as 6 months of on time payments is enough to improve their credit score, but this will depend on your previous credit history.

How does buying a car negatively affect credit?

Missing a single payment can lower your credit rating, particularly if you don’t make the payment quickly. The lender is likely to report it to the credit reference agencies.

If you fall far behind with car finance repayments the detrimental effect on your credit rating will be severe and long-lasting.

Some lenders will declare the loan to be ‘in default’ after just 30 days. Others allow around 90 days before they call in debt collectors to recover the amount, or to repossess the car.

Defaults remain on your credit file for up to seven years and can limit the attractive finance deals that you’re offered in the future. If your credit rating is very low you may not be able to borrow at all until it improves.

Related Reading: Does Car Loan Refinancing Affect Your Credit? 

Does car finance affect getting a mortgage?

If you pay your bills on time it will improve your credit and thus your chance of getting a mortgage. If you default on your finance payments, the bank will be less likely to offer preferable mortgage rates. 

Because your proposed mortgage lender will use your credit score when considering your mortgage application, car finance affects this in a similar way to any borrowing.

Car finance and your credit score

By limiting the number of car finance applications you make and checking that only ‘soft’ searches will be carried out, you can protect your credit score and there should be no negative effect.    

If your application is successful, car finance will have a positive effect as long as you make all your repayments on time.

Demonstrating that you can manage your money responsibly has the biggest positive influence on your credit rating and can lead to better deals on loans in the future.   

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