Does Car Finance Improve Credit Score

Does Car Finance Improve Credit Score

Car finance is one of the most common forms of borrowing in the UK, helping thousands of people get on the road without needing to pay for a vehicle upfront. But beyond getting you into a car, car finance can also play a role in shaping your credit score. If you’re considering a car on finance or already have one, you might be wondering: does car finance improve your credit score?

The answer is yes, car finance can improve your credit score, as long as you manage the agreement responsibly. Like any form of credit, your payment behaviour, loan terms and credit usage all influence how your score changes over time.

In this article, we’ll explain how car finance affects your credit report, how it can help (or harm) your score, and what steps to take to ensure it boosts your credit profile rather than bringing it down.

How Car Finance Works

Car finance allows you to spread the cost of a vehicle over time, usually through one of the following types of agreements:

• Hire Purchase (HP): You pay in monthly instalments and own the car after the final payment

• Personal Contract Purchase (PCP): You pay monthly, then decide at the end whether to return the car, pay a lump sum to buy it or trade it in

• Personal Loan: You borrow a lump sum from a bank or lender and use it to buy the car outright

• Car Leasing: You rent the car for a fixed period with no option to buy

Each of these finance options involves a formal credit agreement, and the lender reports your payment activity to credit reference agencies such as Experian, Equifax and TransUnion.

How Car Finance Can Improve Your Credit Score

1. Builds a consistent payment history
Payment history is one of the most important factors in your credit score. Making your monthly car finance payments on time shows that you are reliable and responsible with credit. Over time, this positive history can improve your credit rating.

2. Diversifies your credit mix
Lenders like to see that you can manage different types of credit. Car finance is considered an instalment loan, which differs from revolving credit such as credit cards. Having both types in your credit report can boost your score slightly, provided everything is managed well.

3. Shows long-term financial responsibility
Car finance agreements usually last between 24 and 60 months. Successfully managing an account over that length of time shows lenders that you can handle long-term financial commitments, which can reflect positively on your credit score.

When Car Finance Can Hurt Your Credit Score

Car finance can have a negative impact on your credit score if not handled properly. Here are some ways it can lower your score:

1. Missed or late payments
If you miss a payment or pay late, it will likely be reported to the credit agencies. Even one missed payment can reduce your score and stay on your credit file for six years.

2. High credit utilisation
At the beginning of the finance agreement, you owe a large amount relative to the original loan. This high utilisation can lower your score temporarily, especially if you take on other debts at the same time.

3. Multiple credit applications
When you apply for car finance, a hard credit check is usually carried out. Too many credit applications in a short period can make you appear financially stretched and may reduce your score in the short term.

4. Voluntary termination or repossession
If you end the agreement early through voluntary termination or default on the loan, the event may be recorded on your credit file and affect how lenders view you in the future.

Real-World Example

Emily took out a PCP agreement for a car in 2020. She made every payment on time and completed the agreement in full. During the contract, her credit score gradually improved as the account aged and showed consistent payments. After two years, she was approved for a mortgage in part due to her strong credit history.

By contrast, Jordan missed two car finance payments due to a change in income. The missed payments were recorded on his credit file and caused his score to drop. He struggled to get approved for a credit card six months later.

How to Use Car Finance to Build Your Credit Score

If you're using car finance and want to strengthen your credit profile, follow these tips:

• Always pay on time: Set up a direct debit or reminders to avoid missing payments

• Don’t borrow more than you can afford: Stay within your budget and avoid stretching repayments over too many years

• Monitor your credit report: Use services like Experian, ClearScore or Credit Karma to track your progress and spot any errors

• Avoid multiple finance applications: Only apply when you're ready to commit

• Keep the account open for the full term: A long-standing, well-managed account is great for your credit history

What Happens After You Pay Off Car Finance

Once you complete your finance agreement:

• The account will be marked as settled on your credit file

• Your credit utilisation will drop, which may increase your score

• The positive payment history will remain on your report for six years, continuing to benefit your credit profile

Paying off car finance in full and on time shows lenders that you are a low-risk borrower, improving your chances of getting better credit offers in the future.

Final Thought

Car finance can improve your credit score if you manage it correctly. It helps you build a track record of timely payments, demonstrates that you can handle instalment loans, and adds valuable information to your credit report.

However, if you miss payments or borrow beyond your means, it can have the opposite effect. Like any form of credit, car finance should be used carefully and with a clear repayment plan. If done right, it not only gets you behind the wheel but also puts you on the road to stronger credit.