Does leasing a car build credit?
Quick insights
- Securing a lease and managing it responsibly may help improve your credit score over time.
- Leasing a car can impact your credit negatively at first but may ultimately be an opportunity to build your credit.
- Financing a vehicle can affect your credit in positive and negative ways, but there are factors that may support your decision.
Leasing a car can have positive and negative effects on your credit. The initial credit inquiry could hurt your credit score temporarily, but don’t reach for the panic button on your car key fob. In this article, we’ll break down how leasing a car affects your credit.
How does leasing a car affect your credit?
Leasing a car has pros and cons but may help you build your credit over time in a few ways.
The initial credit inquiry
When you decide to lease a car, the leasing company or dealership will typically conduct a hard inquiry into your credit report. You approve this when you apply for the lease. The hard inquiry that is conducted as part of your application review will give potential lenders access to your credit report. The information in it, such as payment history and total outstanding debt, will be reviewed. This review in and of itself doesn’t affect your credit but could influence the approval and terms of your lease, including your interest rate.
The impact of a hard credit inquiry is usually a small and temporary decrease to your credit score. If you’re shopping around for a lease and have multiple credit inquiries, you may worry about a major impact to your score. However, this may not be the case if they’re conducted within a 14-day frame because some credit scoring models count the related inquires as one.
Broadening your credit mix
One aspect of your credit that factors into your credit score is yourcredit mix. Everyone’s credit mix is different—it could include student loans, a mortgage, credit cards, etc. An auto lease could diversify the mix of credit accounts that are recorded on your credit report.
Payment history
Once you secure a lease, your account and monthly payments may be reported to the credit bureaus. Missing lease payments can result in a negative entry on your credit report, potentially causing your credit score to decrease. Conversely, consistently making payments by the due dates may have a positive impact on your credit score over time.
What credit score is needed to lease a car?
The specific credit score required to lease a car can vary depending on the leasing company, the type of vehicle and even economic conditions at the time you apply. In general, the terms of a lease may vary based on your credit score and the information in your credit report.
VantageScore® and FICO® credit score ranges are general guidelines for what is considered “good” and “poor” credit. Lenders have their own criteria and credit score thresholds, and credit evaluations normally consider more than just scores: overall credit history, debt-to-income ratio, etc.
Leasing vs. buying a car
Leasing and buying a car can have similar impacts on your credit score, both at the time you apply and over the course term of your lease or loan contract. Applications for a vehicle typically require a hard inquiry, whether you want to lease or buy. The effects of a hard inquiry on your credit score in either case may be similar. Plus, soon after you sign a lease or loan contract, the new line of credit may broaden your credit mix, opne of several factors in credit scoring.
Whether you lease or buy, you agree to make monthly payments over a period of time. Payment history is a factor in your credit score, regardless of whether you lease or finance. On-time payments and missed or late payments are both reflected in your credit report accordingly.
Improving your credit to be eligible for a lease
Whether you’re considering buying or leasing, strategies associated with strong credit management include:
- Paying your bills on time. Payment history is a key factor when calculating your credit score, including paying credit card balances and loan installments on time and in full.
- Lowering your credit utilization ratio. Lowering this ratio to about 30% and lower may help improve your credit score, as it shows you don’t need to rely as heavily on credit.
- Paying off your debts. Paying off your debts on time may help lower your debt-to-income ratio, which is another factor that lenders may consider when approving credit. Note: Debt-to-income ratio (DTI) is not a direct component of most credit scoring models (FICO, VantageScore). It may be a factor lenders consider in underwriting.
- Monitoring your credit report. Reviewing your credit report may reveal inaccuracies or signs of potential fraud or theft. Catching these early on and reporting them to the credit bureau(s) may impact your credit score.
- Considering enrollment in Chase Credit Journey®. Chase Credit Journey is a free online tool for anyone 18 or older with a valid U.S. address and Social Security number, offering access to your credit score and personalized score improvement plans provided by Experian–no Chase account required.
In conclusion
A lease application involves a hard inquiry, which could cause a brief drop in your credit score. However, getting approved for a lease may present opportunities to build credit over time. For one, you’ll have a chance to make monthly payments on time. This may contribute to positive payment history and impact your credit score accordingly. The vehicle lease itself could also add variety to your credit mix, another important factor in improving your credit score.
