A car lease makes it possible to try out a car before you buy it, unlike a car loan where you already have purchased the vehicle. Most of us know that a car loan will show up as a part of our credit history but what about a lease agreement? Leases aren’t as long-term or necessarily include a purchase at the end of it, which can make things confusing. Despite their differences, just like a car loan, a car lease will appear on your credit reports.
Continue reading to learn more about where your lease will show up on your credit reports and how it can affect your credit scores.
So, Are Leases Considered Credit Accounts?
Yes! Although a car lease isn’t like a traditional loan where you borrow money and then pay it back, it is still considered a credit account. This is because the lender lets you borrow the vehicle and drive it for a price. When you sign a lease agreement, you promise to make monthly payments until the lease is over.
Where Are Leases Listed on Credit Reports?
If you haven’t checked your credit reports before, you may not be aware of where information like your credit accounts, which will include a lease, will be. Your credit report will have accounts listed around the middle after some personal information. Here is some of the information you will see about the lease:
The Origination Date
You should see the origination date of the lease and the lease term. Ensure that everything looks good with the origination date and the lease’s length.
Most leases, when it comes to repayment, work like installment loans. And your credit reports should have up-to-date information on payments that you have made, including any late payments.
The Leasing Company
Whether you took out a lease through a dealership or a private leasing company, the right lender should be listed on your credit report.
The balance you have paid off and the remaining balance should also be shown on your credit report. Common errors on credit reports include balance errors, so make sure that the information on there is correct.
A cosigner can be a family or friend who has good credit who can add themselves to a loan application to increase another person’s chances of approval. So, a cosigner can make it possible to get a car lease even with bad credit. If you have a cosigner on your car lease, that should be listed as cosigner information on your credit report.
How Can I Get Copies of My Credit Reports?
If you want to check your vehicle lease on your credit, you can request a copy from any of the three major credit reporting agencies/credit bureaus (Equifax, Experian, and Transunion). Every individual is entitled to a free credit report from each bureau every year, which you can request online.
How Can a Car Lease Impact Credit Scores?
Because a car lease is a credit account that will be listed on your credit report, any action you take with it will be listed on there too, impacting your credit scores. Additionally, a lease on your credit report will affect your credit portfolio. Continue reading for more information on that:
Your Debt to Income Ratio and Credit Utilization
Adding a loan to your credit will increase the amount of debt you have. There are a few things that this will impact. One of them is your debt to income ratio, which measures the amount of credit accounts you have to your income. While your credit utilization ratio compares the amount of debt to available credit you may have. All of your existing credit accounts, including any revolving and installment accounts are included in your owed debt amount. Generally, you want to keep these ratios lower than 30%. Adding a lease can sometimes negatively impact these ratios, so keep that in mind before signing up for a new car lease.
Your Lease Payments
How you make your payments will significantly impact your credit scores. With on-time monthly payments, you may see an improvement in your credit score. While late payments can negatively affect your credit for up to seven years!
Loan default on your car lease happens when you have several missed monthly lease payments or do anything else to break the vehicle lease agreement. Breaking a car lease can significantly hurt your credit score and also stay on your credit report for up to 7 years.
Adding a loan like a lease can help diversify your credit mix, especially if you have not had something like a car loan on your credit report before. A diverse credit mix can help boost your credit score, especially if you have a limited credit history.
A car lease will show up on your credit reports just like any other credit account. Depending on your existing credit portfolio and the actions you take, your car lease can either harm or improve your credit score.