Finding a new car is usually the fun part. Financing it on the other hand? Less fun. Seemingly endless options and reams of legal documents can put a dampener on the occasion. But funding your new vehicle doesn’t have to be a headache. In fact, it’s often an opportunity to strengthen your Credit Report, making it potentially easier and cheaper to get further credit later on down the road.

Be warned. Where there is potential to improve your Credit Report, there is also the possibility to damage it – this all depends on how your new credit account is managed.

How does car finance appear on Credit Reports?

There are four main forms of credit that drivers use to obtain a new vehicle. These are hire-purchase (HP) agreements, personal contract purchase (PCP) accounts, personal contract hire (PCH) - otherwise known as leasing - and personal loans. There are other, less popular options available too – as well as cash – but these four are the most common types found on Credit Reports.

Buying a car with cash will not appear on your Credit Report, as no credit agreement has been taken.

If you take out a hire-purchase, PCP, PCH agreement or personal loan to finance your new car, you will likely see the new credit account appear on your Credit Report. The account will show the lender name, outstanding balance, the agreement start date, your personal details such as name and address, and more. Most importantly, there will also be a monthly record of your repayments.

This repayment history will show when you’ve made a payment on time and, conversely, if you’ve missed a payment. It’s this repayment history that carries the potential to help or hinder your Credit Report.

It’s worth noting that your car finance applications will also appear on your Credit Report. If you apply for a hire-purchase, PCP, PCH or personal loan to fund the purchase, a credit application search will be recorded in the ‘Searches’ section of your Credit Report, detailing the lender name, date of application, and your details. The outcome of the application, however, will not be recorded, so your Credit Report will not state whether you were accepted or refused.

How can car finance improve your Report and Score?

Whichever type of credit you choose to finance your car, the account can either improve or damage your Credit Report, depending on how you manage the account.

Lenders use Credit Reports to gauge their customers’ creditworthiness, so they can determine how reliable they are likely to be at repaying the amount borrowed. For this reason, whenever you apply for credit, the lender will search your Credit Report for any evidence that demonstrates you as a dependable customer.

Any credit card accounts, loans, mortgages, phone contracts, and more, can improve the state of your Credit Report, as long as they show a healthy history of being paid on time each month. Car finance accounts are no different. Providing the account is managed well, you can expect it to improve your Credit Report.

Put simply, the car finance account will likely improve your Credit Report as long as you make all payments in full and on time each month. The older the account becomes, the greater positive influence it will have, as there will be a larger body of evidence showing you as a consistent payer.

On the flipside, the account could harm your Credit Report if you start to miss payments. Late payments will be recorded against your Credit Report for lenders to see, and this is how the account can potentially harm your Credit Report.

A single late payment is a minor negative marker, so will harm your Credit Rating slightly. Arrears (consecutive monthly late payments) are even more harmful while defaults are the most severe negative marker you can have reported. Accounts are usually defaulted after a sustained period of non-repayment, when the lender believes the agreement to have broken down. They will then usually commence recovery action, either of the vehicle or any outstanding balance.

These negative markers can harm your Credit Report, making it harder to be accepted for credit when you next apply. The credit application search that is recorded when you submit your application can also affect your Credit Report, but usually not in a major way. Lenders are cautious to lend to customers who appear ‘desperate’ for credit. Having an abundance of these searches in a short period of time can be seen as a sign of desperation, so too many searches can be a bad thing.

The average number of credit application searches per month that lenders expect to see is one to two.

Does Voluntary Termination hurt my Credit Report?

Once you have paid back at least 50% of your hire-purchase, lease or PCP, you can end the agreement early, which is known as ‘voluntary termination’. Any final payments (known as ‘balloon payments’) will also need to be paid.

You may decide to end the contract early if you are struggling with payments, following unexpected unemployment for example. Note that if you have purchased the car using a personal loan, you will own the vehicle fully at point of transaction, so the agreement cannot be cancelled this way.

The car will have to be in good condition to be able to voluntarily terminate your agreement. Wrecking the car and leaving it outside the dealership halfway through your contract is likely to be expensive, so is not recommended.

Regarding your Credit Report, voluntarily terminating your car finance agreement is considered equivalent to settling and closing an account under normal circumstances. It is therefore neutral, and not seen as a negative.

It’s worth noting that if the car finance account has been managed well and all payments were made on time and in full, it will contribute positively to your overall Credit Score. This is true whether the account is open or closed, but the positive effect will likely be greater while the account is open. For this reason, you may see a slight decrease in your Credit Score after closing the account.

What if my car finance account doesn’t appear on my Credit Report?

Most lenders that offer car finance will share details of their customers’ credit accounts with a Credit Reference Agency (CRA); however, there is no guarantee that all lenders will share your account information with all Credit Reference Agencies. This means that your credit account may appear on your Credit Report with one CRA, but maybe not with the others.

For this reason, it’s best to check your Credit Report at all three Credit Reference Agencies – Equifax, Experian, and TransUnion to ensure that you have seen everything that your lenders have shared about you.

You can’t be sure which CRA will be accessed by a particular lender when you apply for credit, so keeping on top of the complete information across all CRAs will let you be confident knowing that there are no surprises hiding on any of your Credit Reports.

Lenders tend to share new information with the Credit Reference Agencies on a monthly basis, so it may take them up to six weeks to report your new car finance account to the relevant CRAs. If you can’t find the account on your Credit Report, and it was only recently opened, this will likely be due to the reporting time for the lender and should appear automatically once sufficient time has passed.

Once the account appears on your Credit Report, it will start affecting your Credit Report and Credit Score. Usually only slightly at first, the effect of an account will increase as it becomes older. Maintaining a credit account well for a few years can boost the health of your Credit Report, as the account can be used as evidence of you being a reliable payer.

To sum up

• Car finance accounts can improve your Credit Report, as long as you manage the account well and ensure that all payments are made on time and in full each month. Repayment history that shows you as a reliable borrower will be seen favourably by prospective lenders, making it easier for you to be accepted for credit later on.
• Accounts can also harm your Credit Report if you miss payments, enter arrears, or default on the agreement. This can make it harder and more expensive to get further credit. The car may also be repossessed by the lender to cover the owed amount.
• Voluntarily terminating a car finance account is usually not seen as a negative by lenders, although the positive influence of a well-maintained account will be slightly lowered after account closure.

How to check your Credit Report

You can check your Multi Agency Credit Report with checkmyfile free for 30 days, then just £14.99 per month. Sign up is quick and cancellation is easy online, at any time.

You’ll get access to your complete Credit Report information from all three Credit Reference Agencies – Equifax, Experian, and TransUnion – letting you see what a lender sees. Our expert Credit Analysts are accessible through your account if you need any guidance.