Does Leasing a Car Help Your Credit Score?

Another benefit of leasing is the lower monthly payment you’ll make because of the way car leases work.

Does Leasing a Car Help Your Credit Score?
car lease

Leasing holds many advantages for people who prefer to drive newer cars and keep their vehicles under the manufacturer’s warranty throughout their ownership. Another benefit of leasing is the lower monthly payment you’ll make because of the way car leases work. With all of this in mind, it makes sense to wonder if leasing a car can also help your credit score.

Let’s take a look.

How Credit Scoring Works ?

The credit reporting bureaus Experian, Equifax and TransUnion get data from lender sas you make monthly payments on your various lines of credit. They’re told when you make payments on time, they’re told when you make payments late and they’re told when you miss payments altogether. The bureaus are also informed when you open new accounts and close existing ones.

A numerical ranking is applied to your record, based upon the performance it reflects. Making payments as scheduled, using credit sparingly and properly maintaining accounts for long periods of time figure highly into this scoring. Other elements considered are how often you apply for new credit and the types of credit you have. The stronger your performance in all of these areas, the higher your ranking (your credit score) will be.

How Does Leasing a Car Fit into This?

For all intents and purposes, your lease contract is treated the same as a loan contract. In other words, the timeliness of your payments figures highly into the way your creditworthiness is viewed by subsequent lenders.

So yes, leasing a car can help your credit score, even when you take advantage of lease deals.

However, leasing a car can hurt it too.

Let’s say you’re leasing a $50,000 car. That lease appears on your report as a $50,000 obligation, even though you’re only contracted to repay a fraction of that amount. This can compromise your debt-to-income ratio, which in turn could lead to you being turned down for a loan in another area.

Now, let’s say your income leads lenders to determine you’re good for up to $100,000 in credit in total. That $50,000 obligation gives the appearance you’ve already used up half of your potential and will lower your score.

Moreover, ending a lease early can make the account appear to be closed on your credit report.This too can have a detrimental effect on your score, as itcan give the impression you settled the account for a lesser amount,rather than paying it in full.

Do the Benefits Outweigh the Detriments?

As with so many other things, the answer here is,“It depends.”

Leasing a car is one of the smartest ways to drive under certain circumstances. As we mentioned at the top of this article, you’ll have lower monthly payments, you’ll drive a newer car and you’re generally freed of maintenance and repair concerns.

On the other hand, if you’re someone who likes to hold onto a car for many years, you’ll make out better in the long run if you purchase it right off the bat. Fees and other expenses associated with leasing can make it a bad deal if you’re one to keep a car for a decade or more.

Meanwhile, the effect on your credit score is the same whether you buy or lease. After all, everything is predicated upon you living up to the terms of the contract. So yes, leasing a car can and does help your credit score — as long as you go into the deal carefully and keep your financier happy.

personal finance
Alica Knopwood
See all posts by Alica Knopwood