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Lenders tend to favour borrowers with a diverse credit mix as it proves that they are able to manage different types of loans.
A recent survey suggests people across Great Britain are the least likely in Europe to think about their credit score, with nearly half of adults (46%) not even aware of their current financial rating. Having good credit worthiness 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 the latest statistics, an estimated one-in-five Brits have a poor credit rating. However, the good news is that there are several ways to improve your score, including taking out car finance.
Money experts at vehicle finance company First Response Finance, have shared how it can boost your credit score, establish credit history, build a positive payment footprint and more.
READ MORE: 25 ways first-time buyers can boost their credit score to get on the property ladderREAD MORE: Millions of people due £1,100 car finance compensation update this month
It’s important to be aware that this is obviously a high value purchase on credit, there are other ways to improve your credit score such as getting on the electoral register – which more people may have already done in order to cast their vote in last week’s general election.
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.
First Response Finance explained: “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 per cent 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.
First Response Finance said: “Successfully managing a car loan will show that you’re a reliable borrower. 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.
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.
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