Does car finance affect credit score

Buying a new car is a big investment and it can put a big dent in your savings. That makes applying for a car loan a viable alternative for people who may not be able to afford the cost of purchasing a car upfront.

One question that car buyers often have is, "will applying for a car loan will affect my credit score?" The short answer is "yes", but there is much more to it than that.

In order to understand how applying for a car loan might positively or negatively impact your credit rating, it is important to understand some basic financial principles.

A credit score is calculated by a credit reporting agency -- usually one of the big three: Equifax, Experian, or TransUnion -- and is based on your financial borrowing history.

It is used to tell lenders how reliable you will be as a borrower to meet your loan repayments, and is usually presented as a number between zero and 1200.

You can easily find out your score before the lender you choose does.

You have a legal right to get a copy of your credit report for free every three months. It's worth getting a copy at least once a year, whether you are applying for a loan or not.

How do you check your credit score? Go to the website of one of the above providers and fill out a few details.

https://www.equifax.com.au/

https://www.experian.com.au/

https://www.transunion.com/

Generally, it involves completing the following steps:

* Verify your identity using your driver licence number

* Provide other information including your name, date of birth and residential address (if you have lived there for less than three years you may need to provide other recent home addresses too)

If all the information has been entered correctly, your score should be generated within a few minutes

Lenders will use your credit score to determine whether or not they are willing to lend the money you need to purchase your new car.

A credit report will provide a detailed history of a person's financial reliability and borrowing information, such as the types or financial products you already have, as well as your repayment history or any overdue debts.

Each time you submit an application for a loan, the lender will conduct a credit check, which leaves what is known as a "hard inquiry" on your credit report.

Too many "hard inquiries" can impact your credit score, so submitting multiple credit applications is not a good idea. Also, being denied for a loan can cause your credit score to fall, which may be a red flag for potential future lenders that you are not a great risk.

Instead of submitting multiple loan applications when looking to purchase your new car, it can be more beneficial to do your own research first to find a suitable loan. Make sure you meet eligibility criteria and all the requirements first before submitting your application.

Leasing a car can actually improve your credit score over time, provided you make all your repayments on time, as this also becomes visible on your credit report and has a positive impact on your credit history.

Many lenders require borrowers to have a credit score of at least 622 to qualify for a car loan, which puts it within the "good" range, or higher.

If you have a credit score in the "average" range -- 510 to 621 -- because you have missed loan repayments with another lender, you may need to meet additional requirements to gain loan approval this time, as potential lenders will assess you as a higher risk.

Having a high credit score can also assist a buyer with being offered a lower interest rate by potential lenders, and the opposite affect can be had for people with a lower score.

Generally, the lower your credit score, the higher the interest rate you will pay.

Lenders often charge higher interest as added security; in case you fail to make on-time payments.

If your credit score is in the "excellent" range -- 833 to 1200 -- you can generally expect to receive the lender's best available interest rate.

Other ways to improve your credit score range from opening other credit accounts, such as a credit card, or taking out a personal loan -- provided you have had them for some time and have never missed a payment. Successfully managing these debts show your financial responsibility to credit bureaus or potential lenders and, in turn, positively impact your credit history.

Paying off your car loan -- leaving you debt-free -- may cause your credit score to dip for a short time, because it will no longer be listed as a credit product on your file. No debt on your file may make it harder for a new lender to assess your credit risk.

If your car loan is your only debt, or your longest held credit account, the length of your credit history will be shorter. Longer credit histories are generally more desirable to potential lenders, as it allows them to get a more detailed idea of your credit behaviour over a long period of time.

Although there is no specific outline to successfully manage your credit score, it is important to research what is required to receive a loan approval or get the best interest rates, and it is always in your best interest to present as a desirable customer to potential lenders in order to secure a car loan.