Anything to do with repayment finance can and will affect your credit score. However, this doesn’t have to be a negative thing.
Leasing a car can actually be a really good way of improving your credit score. But it should be noted that improving your credit score can take time, and leasing a car can negatively impact your credit score before it can improve it.
However, as long as you can demonstrate to lenders that you can handle your lease payments responsibly, your lease should reflect well in your credit report.
We understand that credit score is really important and it’s something we get asked about a lot. That’s why we put together an article explaining exactly how leasing a car will affect your credit score.
Will my Lease Payments Affect my Credit Score?
Yes, it will. From a credit standpoint, a lease is essentially the same as a car loan.
When you lease a car, you’re agreeing to pay a certain amount every month until the term of the lease expires (typically around 2-3 years depending on your contract).
Since 35% of your credit score is based on your payment history, leasing a car can have a significant impact on your credit score.
When you make all of your lease payments on time, as I’m sure you always do, your credit score should improve. However, like anything to do with financial agreements, as soon as you miss a payment your score will reflect that.
The fact that it’s a lease scheme will have no additional effect on your credit score. It will have the same impact as other types of repayment schemes such as a bank loan.
The longer you successfully make your lease payments on time, the greater the positive effect on your credit score. It’s very straightforward.
Does the Length of my Lease Have an Impact on my Credit Rating?
When you take out a lease, the length of your lease won’t necessarily affect your credit rating, but it may affect the rate of the change in your credit rating.
Your creditor typically reports how much you owe the leasing company over the period of the lease, which can be a significant number.
Car leases are reported as installment accounts on credit reports and are treated differently than revolving accounts, such as credit cards. Your credit score takes into account the fact that your installment account will be paid over time with regular payments.
While 30% of your credit score comes under the category of “amounts owed”, a significant part of this comes from the percentage of revolving credit you are using. This is known as your revolving credit utilisation. However, your credit score will improve the more you pay of your outstanding lease.
In simple terms, the longer you lease, the slower your credit score will improve as it will take longer for the full amount owed to be paid off.
However, this doesn’t mean you should go for a shorter lease for a quicker payoff. Missing a payment will be far harder to rectify, and so going for an affordable amount over a longer period is generally recommended.
Will the Installment Account Improve my Credit Rating?
Because a car lease is an installment account, it may improve your score just by appearing on your credit report.
The type of credit you use counts for 10% of your credit score and by varying the amount of accounts you open, you increase the amount of credit you have.
For example, if the only debt you have is a credit card debt, adding an installment account to your credit history will improve your credit mix and raise your credit score.
Will Leasing a Car Affect my Credit History?
The remaining 25% of your credit score consists of the length of your credit history and the amount of new accounts or enquiries you have. Taking on a new car lease could hurt both of these components.
Your credit score can go down if you open a new account or request new credit depending on how many applications you have made in the previous 6 months. If you have made it up to two, you shouldn’t see a change. Any more than that, however, and there’s a chance your score will go down.
New credit enquiries drop off your report after just two years, and then they no longer affect your credit score. Your accounts will naturally age and the longer you make timely payments on your car lease, the more your score will improve. So, although there may be an initial negative impact, your credit score will likely improve in the long run. As long as you meet your payments, obviously.
Where Can I Check My Credit Score?
There are quite a few websites where you can check your credit rating. The most well-known and trustworthy are;
However, it should be noted that while these websites offer 30 days free, they will charge you a fee after that 30 days is up. You can cancel this at any time.
It should be noted that different websites may show different credit scores. This is due to the fact that the algorithms they use may vary slightly, so it’s worth checking more than just the one website. Also, a credible leasing company or broker will understand the requirements of each finance house. Therefore they should advise you on which credit report would be most useful for your situation.
Can I Lease if I Have a Bad Credit Rating?
This is a tough question, and the answer is that it depends. There is a chance that you can lease a car if you have a bad credit rating; however, it depends entirely on your individual situation.
Some dealers will run for the hills when you tell them that you have bad credit. This is because either they don’t have the knowledge or they don’t have the contacts to arrange a lease deal for you.
However, there are some car dealers and brokers who work with specialist finance houses who deal with those with bad credit scores. Though, even specialist funders will need proof of affordability and will require a lot of information before they can approve finance to someone with bad credit.
It’s always a good idea to put yourself in the shoes of the lender and look at it from their point of view. For example, does the payment history, earnings and outgoing payments indicate that this person would be able to afford a lease? If the answer is no, then you probably aren’t going to be able to get the finance.
Do Car Funders Work on Credit Score?
Due to its efficiency, most lenders have an auto approval system which works solely on credit score to make a decision. Therefore if you have a bad credit score you’re most likely to going to get rejected straight away.
However, if you don’t get approved instantly then a human will look at your credit score, how much borrowing you have and your payment history. This means that there is a chance you will get approved for finance. Especially if you have a legitimate reason for missing payments, or can show that it was an uncommon occurrence. But, this won’t always be possible. The best thing to do is to go through a broker that will understand your situation and point you in the direction of the best funder for your circumstances.
Will my Lease or Car Finance Cost More if I Have Bad Credit?
If you have a bad credit score then you are automatically a higher risk to the funder. This means that your payments will be higher.
However, there is the option to go for a short term lease. If you have defaults from five and a half years ago that are going to drop off in six months then it may be wise to get a short term rental.
You can lease a car for a short period of time, up to 12 months for example, which means you only have to pay the higher price for a shorter amount of time. Once this short term lease is up and your CCJ has dropped off, you can switch to a long-term lease.
Will Leasing a Car With Bad Credit Negatively Affect my Credit Score?
It shouldn’t, in fact it should do quite the opposite. With every payment that you make on time your credit rating will improve.
However, if you have to go through multiple credit checks when trying to choose a lease deal, this will have a negative impact on your credit rating the same way it would if you had a good credit rating.
I have only really touched upon leasing with a bad credit rating, so if you want to find out more about leasing a car with bad credit then you can read this much more in-depth article here.
Ultimately, leasing a car will effect your credit score. However, this isn’t always a bad thing and leasing a car can actually be a really good way to improve it.
Matt is known for being the joker around the office, but he also takes his job seriously. He's got a knack for knowing the best ways to get people approved on credit and works directly with OSV's key accounts across the UK.
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