Does Car Finance Affect Credit Score?

Does Car Finance Affect 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, helping us to get good deals on mortgages and loans, so does car finance affect credit scores for good or bad?  

Well, it can have positive and negative effects at two different stages. So let’s look at how car finance impacts your credit rating, and see what you can do to minimise the negative effects. 

What is a credit score? 

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

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

So how exactly does car finance impact credit score? 

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 and 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 and gives 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 via car finance. 

Repayment stage 


If you miss any repayments, pay late, or pay less than you’re supposed to, it harms your credit score significantly 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, so it’s important to be as sure as you can 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, and 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 credit rating. This is because too many applications suggest that you’re urgently in need of money and lenders can see the searches that have been made. 

How buying a car can impact your credit 

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 and 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 does buying a car negatively affect credit? 

Missing a single payment can lower your credit rating, particularly if you don’t make up the payment quickly, as 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, whilst others allow around 90 days before they call in debt collectors to recover the outstanding 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?

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.  

Bumper offers interest-free loans on car repairs to keep your car on the road and help you manage your money.

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