Brits are the least likely in Europe to think about their credit score, with nearly half of UK adults (46%) neglecting what their current rating is.
Having a good credit score can pave the way to many useful benefits, including access to better borrowing terms, lower interest rates, and improved chances of successful loan applications.
According to recent statistics, about one Brit in five has a poor credit rating. However, the good news is that there are several ways to improve your score – and taking out car finance, for example, can help do just that. But how exactly?
Jonathan Such, head of sales at vehicle finance company First Response Finance, explains how car finance can boost your credit score, highlighting some of its most prominent long-term advantages.
Establish credit history
One of the most appealing benefits of taking out car finance is that it can help establish a longer credit history. This is especially true for those motorists who are new to credit or have a limited credit history.
Such said: “Buying a car is often one of the first significant investments you make, particularly if you’ve passed your test at a young age and are looking to hit the road as soon as you get hold of your driving licence.
“There’s a chance that, at this stage of your life, you may have limited credit history – or no history at all. In this scenario, a car loan can kickstart your credit profile, making it easier for you in the future to obtain other forms of credit.
“In fact, length of credit history is an important factor in the eyes of a lender, and it can actually make up 15% to 20% of your credit score.”
Build a positive payment history
As well as helping (younger) drivers get on the credit ladder, taking out car finance allows you to build a positive payment history.
Sticking to your monthly instalments and making on-time payments will work wonders on your credit rating, as it shows you have the ability to manage and keep up with your bills. This is something that future lenders will consider carefully when deciding whether to give you a loan or not.
Ultimately, finance providers are more likely to lend you money if they can see that you’ve been able to keep up with regular payments in the past.
Demonstrate financial responsibility
In line with what’s been said above, adhering to your monthly instalments in a timely fashion and building a positive payment history through car finance will help you demonstrate financial responsibility and creditworthiness.
“Successfully managing a car loan will show that you’re a reliable borrower,” Such added. “It indicates that you’re able to meet deadlines and respect agreement terms, meaning you aren’t a risk to credit lenders.
“Reliability and responsibility are things that finance providers take into serious consideration when evaluating an application. A good track record of timely payments can make the difference between a successful and rejected loan request.
“Demonstrating trustworthiness by fulfilling your car finance payments can be extremely beneficial if you plan to apply for other types of credit, such as personal loans or mortgages.”
Show a diverse credit mix
A ‘credit mix’ refers to different types of loans you’ve taken out.
In short, there are two forms of credit – instalment and revolving. The former consists in loans that have fixed monthly repayments and a set end date, such as car finance.
The latter, instead, is a type of loan that has a minimum monthly repayment figure but no specific end date or balance (i.e., credit cards).
Credit scoring models tend to favour borrowers with a diverse credit mix, as it proves that they’re able to manage different types of loans and credits.
So, taking out car finance and adding instalment credit to your file can help you improve your credit ranking and better your ‘reputation’ in the eyes of potential lenders.
As well as allowing you to spread the costs of your new vehicle purchase, taking out car finance can boost your credit score.
From establishing and building a positive payment history to demonstrating financial responsibility and showing a diverse credit mix, car finance can bring a range of benefits that will favourably impress potential lenders, facilitating credit applications in the not-so-distant future.
