When purchasing your first car, you might have lots of questions to ask car finance companies before even thinking about applying.
There are many different elements to car finance and various types to consider, so it can be a little daunting.
Luckily, we are here to help. In this post, we will be discussing whether applying for car finance can affect your credit score and improvements that you can make before applying.
Credit Score: Meaning and Definition
According to financial experts, a credit score is a marker that judges the kind of creditworthiness you have. It takes into account several factors including your monthly earnings, how prompt you were in paying your EMIs, and whether you have ever defaulted on a payment or not.
A credit score is taken into consideration by financial institutions when it comes to offering you a loan. In a way, it acts as a risk assessment for a financial institution. It sees whether there is a higher risk or lower risk in lending money to an individual or an organization.
When it comes to applying for a car loan, the bank financing will want to make sure that you have the capability to repay the same.
No bank or financial institution wants to end up with the default. The entire process becomes too cumbersome when they will have to get the car back, auction it off or resale it. This is why a credit score becomes such an important aspect to gauge a person’s sense of financial worthiness.
Will the Application Process Itself Start to Influence the Credit Score?
In short, this typically depends on the lender. If a lender runs a soft search understand whether you are eligible or not, this will not affect your credit score.
A soft search lets the financial institution understand the capacity of an individual and assess whether he or she will be in a position to pay back the loan through regular monthly payments or EMIs.
However, some other car finance companies may rely on automated responses that are decided by the information you supply when applying. Because of this, you should not apply for too many credit accounts at once as it will show on your rating.
If in doubt, you should conduct comparisons to determine which lender would offer the best deal before applying. Alternatively, you can directly ask your chosen lender about the application process. Reputable lenders should be transparent and clearly explain their processes if you have any questions.
What happens when you Miss your Monthly Car Payments: Does it Influence Your Credit Score?
The simple answer to this is that Yes it does. Anytime you go late on a payment that is stipulated for a specific date, your credit score is going to get affected.
In other words, you end up picking negative months for every single time you miss a payment schedule. Banks tend to take note of this. This will affect your financial worthiness the next time you apply for any other loan. Banks and institutions will get wary of offering you a loan based on your credit history.
How Can I Improve My Credit Score?
If you find that your credit score is impacting a car finance application or you would like to improve your rating before applying, there are a few steps you can take, including:
- Making sure that your name and address are on the electoral roll
- Updating any bills with your new address if you have recently moved house
- Paying off any high levels of existing debt
- Avoiding too many credit applications in a short period of time
- Keeping your credit utilization low
Hopefully, this brief guide to your credit score and how applying for car finance can affect it has helped. If you still need more information about car finance or managing your credit score, please seek impartial help from the Money Advice Service.