Can Buying a Car Build My Credit Profile?

All forms of finance can have an impact on your credit profile, whether that be positively or negatively, and financing a car is no different. 

But if you have a poor credit score and are interested in buying a car, what does this mean for you and will it improve your credit score? Read on to find out. 

What is a credit profile?

Your credit profile is essentially a gateway to your financial history, with everything from credit cards to phone contacts and mortgages included in there. From this, a personal credit score is then calculated, which takes into account how promptly you can pay off debts and the higher the figure, the better your track record is for repaying said debts on time. 

Lenders look at this when you apply for any types of loan to determine your eligibility for being accepted, and you’re much more likely to be if you have a good, high credit score as it shows you’re going to be a trustworthy customer. 

Ways buying a car can impact your credit

Buying a car on credit can have a positive impact on your credit history if:

You make your repayments on time - payment history is one of the biggest factors in determining your credit score.

You add it to a credit mix -  lenders like to see you can be responsible for various different types of loan debts. For instance credit cards and mortgages. This is because it reinforces you as a trustworthy customer and that you’re creditworthy.

However, buying a car can have a negative impact on your credit history if: 

You don’t keep up with repayments - as soon as you miss a payment deadline. You'll normally be given a brief grace period to make up the amount. If you don't pay after a full billing cycle, the lender will report your delinquency to the major credit bureaus, which will negatively impact your credit scores.

You default on the loan - Depending on the lender, they’ll give you 30-90 days after your payment is due before they declare your loan in default. Your account will then be handed over to debt collectors who will contact you to get payment. If you still don’t pay, you could risk your car being repossessed and each of these has a separate effect; staying on your credit report for up to seven years.

You’re unable to afford the loan - The best way to avoid this potential problem is to work out your income before you commit to any loan. Do you realistically have enough disposable income per month to put towards the cost of a new car? If not, and you go ahead with the loan anyway, you’ll risk falling behind on bills, leading to late payments that can damage your credit score.

Other options to build a good credit profile 

Whilst financing a car can improve your credit history, it probably isn’t the smartest decision while you have a low credit score. Instead, you can help boost your score by fully paying off any outstanding debt, or bringing any missed or late payments back to where they should be.

If you’re completely new to credit and want to build your credit history, try credit cards. You can make small purchases on these and then pay them off straight away.

If you have any questions about credit, you can learn more by contacting our team.