If you’re in the markets for a new car, or simply trying to figure out your options, leasing a car has its own merits. The question though is, does a car lease affect your credit score? Simply put, yes it does. They are some important factors that you would need to consider before signing on the dotted line.
Does a car lease build your credit?
Just like any other kind of debt, car lease payments are reported to the credit bureau just like any other credit payment. As such, a car lease does indeed affect your credit score. Just like how on-time payments on a credit card can improve your credit, on-time payments for a car lease can also improve your credit.
When you lease a car, it is usually between 24 and 48 months that you will have the lease payments. Although auto manufacturers aren’t legally required to report lease payments to the credit bureaus, most of them D. In those circumstances, it will be treated like any other debt and can help in building your credit score.
Does a car lease hurt your credit?
Just as much as leasing a car can build credit, it can also hurt your credit. If you miss your lease payments or default on the lease itself, it can cause your credit score to drop. This asked the same way as if you missed a credit card payment or default on a credit card balance.
When you are signing the lease for the first time, you can also expect your credit score to drop a little bit (by about 5 or so points). This is simply because you are now opening a new line of credit, and causes a temporary dip in your score. Over time, this slowly wears off.
When you are shopping for a car lease, be careful not to you apply to multiple places as this causes a hard inquiry on your credit. Your credit will be slightly lowered each time you incur a hard inquiry, so make sure to keep that in mind.
Does paying off a car lease early hurt your credit?
If you are done with a car and simply want to pay off your lease early, this might have negative impacts on not only your finances but your credit as well. Usually, there are stiff penalties that come with paying a lease off early. Make sure to read your contractual agreement before doing so.
When your car lease is paid off, it does affect your credit score by being reported to the credit bureaus as a closed account. On your credit report, it will look like the Creditor allowed you to pay less than you owed to close it, thus potentially lowering your credit score.
So, be very careful of paying a lease off early. Not only do you want to avoid the fees, but you also want to protect your credit score.
How your FICO score is calculated
Now that you have an idea of how a car lease works and how it can affect your credit score, it’s also important that you have a good understanding of how you are FICO credit score is determined.
- 35% – Payment History
- As you make your car payments on time, this will affect your credit score.
- 30% – Amount Owed
- Depending on how much car you lease, this is the second biggest factor to your score
- 15% – Length of credit history
- If your credit is fairly new, opening new lines of credit such as a release will have a bigger impact than if your credit was older.
- 10% – Credit Mix
- If you have a mix of credit lines, such as credit cards and mortgages, adding at lease will have a smaller impact than if you had very few types of credit on file
- 10% – Opening New Credit
- As I mentioned earlier, when you open new lines of credit, it has a smaller impact on your credit score but wears off as time goes on.
This will give you a good idea of how your FICO score is broken out and calculated. As you can see, your payment history constitutes 35% of your overall FICO score. This is by far the most important metric, so if you’re getting a lease, make sure to always pay on time and in full.
Should you buy or lease a car?
To close things off, determining whether you want to buy or lease a car is really dependent on your financial status and goals. You really just need to figure out if it’s a better financial decision to buy a much less expensive car or at least a newer car.
If you are the type of person that needs to have a new car every few years, and not have to deal with the steep depreciation, leasing might be the option for you. However, if you are more conscious about saving your money and owning something outright, buying a much less expensive vehicle might be a better alternative.
I will always Advocate to avoid leasing or having any car payments but that might not be feasible for many. If you don’t know how to get started in saving up for a car, I have already written an article talking about that exact thing.
Make sure before you lease a car, you understand the implications, the effects of the credit, and the lease agreement to avoid any fees and penalties.