It’s no secret: buying a car requires a lot of money. Money you often have to borrow. A low credit score makes a hefty loan from the bank close to impossible or with exorbitant interest rates. In order to borrow less, you must put down more and sometimes that just isn’t feasible. Car leasing in designed to help you in many different ways, one of them being a great credit booster. A few different factors are taken into consideration when calculating your credit score.
1. Payment History
First things first is your payment history. Creditors take a look at an individual’s payment record to start their scoring off. They are judging you based off of the payments since the accounts were established, to determine whether or not you typically pay your debts on time. This payment history goes a long way in determining how risky you are as a borrower and how likely you are to keep up with your monthly payments. Rack up a few negative marks on your payment history and watch your credit score tumble. However if you have a stellar track record of taking care of your bills in a timely manner, you’ll be rewarded with a higher credit score.
2. Credit Age
Secondly, they take a look at the age of your credit. Generally speaking, most people in their early 20’s to 30’s do not have a long history of credit, because they got their first credit card when they got to college. But, sometimes your age has nothing to do with it, more so how long and established your credit history is. Either way, the length of your credit history has a big impact on your overall credit score, since the lenders have more information to make a decision off of.
3. Credit Utilization
Next, lenders look at your credit utilization. In other words, they want to see how much credit you have versus how much you are using. For example, if your credit card limit is $3,000 and every month you are maxing it out, your credit utilization is inevitably going to be poor. The banks want to see that if you have a total credit allowance of $3,000 you are only using around ¼ of that limit. It shows them you are not solely relying on your credit card to pay your bills, making you less of a risk to default on your payments.
4. Credit Inquiries and Account Diversity
Creditors also look at your hard inquires and the diversity of credit accounts or loans in your name. Hard inquiries are made on your credit every time a loan or credit line decision is being made to help determine approval. For example, applying for a Walmart credit card is considered a hard inquiry, since creditors are seeing if you are in line for the amount of credit you are requesting. Whether you get approved or not, excessively applying for credit cards, loans, or anything major can put a ding in your credit score, dropping it 3-6 points per inquiry.
5. Debt to Income Ratio
The biggest factor when it comes to credit is your debt-income ratio. This is calculated when you add up all your monthly debt payment, such as a car loan, student loans, mortgages, ect, and divide the total by your gross monthly income.
How Leasing A Vehicle Boosts Your Credit Score
Now that you’ve got an idea how your credit score is calculated, let’s look at your new lease and how it’s going to boost up that score.
When you sign those papers for that new lease, you are agreeing to pay a certain amount every month until the lease term expires. With a lease you are generally paying less a month verses when you are financing a car.
Since 35% of your score is bases of payment history, having a lower monthly payment means a higher likelihood of being able to make those payments on time. This In turn, helps boost your credit score up month by month.
Another advantage of leasing is you aren’t borrowing 40k for that car you’ve had your eyes on. You’re essentially on the hook for the total amount you are leasing the car for. For example, if your monthly payment is $250, multiply that by the 36-month lease term and you get $9,000.
That is the amount that the bank is responsible for paying if you default on the payments, so there’s much less risk associated on the bank’s end when that individual leases a car. Making those lease payments on time will only help to improve your credit and increase your credit diversity, helping your score skyrocket by the time your lease term is complete.
Also, your lease will show up as an “Installment Account” on your credit report, and that alone can improve your score. This ties in with the type of credit you have, add variety of the type of credit you hold helps push that score up.
Lastly, 25% of your score is all about the length of credit. Having a 36 or 39 month lease will continue to help you build your credit history, only making you a more attractive option to lenders when applying for that next loan.
Three years will fly by in no time, and before you know it you’ll be in the market for a new car again. However, this time you’ll have more options, because you decided to lease! No need to worry about high interest rates, or not getting improved for that car you want. If you’re in the market for a vehicle, give leasing a shot. With generally lower monthly payments and shorter terms than financing, it’s a great option for those looking to either improve and build their credit or to take your score to the next level.
Here at Capital Motor Cars, we work with all types of credit scores and will negotiate to get you the best rates from banks making that dream car even more attainable. Apply here to see which cars you may qualify for.