Does Leasing a Car Build Credit? The Answer Might Surprise You…
Picture this: You’re racing down the highway in a sleek, black, open-topped Jaguar. The sun is shining, the wind is in your hair and the car is skimming, smoothly across the tarmac.
I mean, I don’t know about you, but I’m off to my nearest car dealer to get myself one of those sleek, black, jags.
Question is, do I buy it outright or do I lease it?
I guess the sensible thing would be to buy it outright. I mean, my parents would certainly encourage me to take that option: “Amanda, leasing a car wouldn’t bring you any value because you won’t own it. In the long run, it will cost you less to buy than it would to lease.” Plus, because it wouldn’t actually be my car, I wouldn’t be able to add brand-new alloys or a shiny new spoiler. And, as a lease is a contractually binding agreement, if my circumstances were to change and I couldn’t afford or didn’t need a car anymore, then it would cost me a fortune to get out of.
Having said all that though, leasing a car does appeal to me because I’ve heard that it can build credit (if you’ve read my previous post, you’ll know that I’ve struggled with a poor credit score before and I’m always on the hunt for hot tips on how to increase it).
But is this true: Does leasing a car build credit?
Let’s find out as we drive our way through this Grow Credit post, stopping at the following places along the way:
Why we want to build credit (quick recap)
Does leasing a car build credit?
How does leasing a car build credit?
Things to consider before leasing a car to build credit (the pros and cons)
Alternative ways to build credit
Let’s get the motor running…
Why we want to build credit (quick recap)
I always think it’s a good idea to quickly recap on why having and maintaining a good credit score is an essential part of life. A good credit score gives you options, and it opens up doors. For instance, with a good credit score, you can borrow substantial amounts of money to buy a house or a car. You can get low-interest credit cards and loans. You can take advantage of incentives like cash back and travel points, and it just makes things like renting and even getting a new job or a promotion easier.
A bad credit score blocks you from everything. You can sometimes even struggle to find a utility company that will take you on if you have a bad credit score. In some cases, they can even make you pay a whopping great big deposit before they’ll agree to serve you.
So, it definitely pays to keep improving your credit score.
But enough recapping! Let’s get straight to the point:
Does leasing a car build credit?
The rumors around the various ways to build credit have been circling for years. But is it true? Can leasing a car build credit?
Seems a little too easy to me.
Before we dive right in though, I want to quickly clarify what we mean by leasing a car, as I wasn’t entirely sure what it meant when I first discovered it.
What do we mean by leasing a car?
“Leasing is another way of financing a car, basically buying the part of the car's lifetime that you will be using.” – Nerd Wallet, What Credit Score Do You Need to Lease a Car?
I always think that leasing a car is kind of like renting a house: You have to make an upfront payment to secure it; you’re contracted to pay a set amount each month for a specified length of time; and you get to use it, like it’s your own, for several years. But you are only borrowing it and, at the end of the contract, if you’ve damaged it in any way, you have to pay additional costs.
So, a car lease is basically an agreement between the company that owns the car and the person that wants to pay to borrow that car for a certain amount of time. It’s a good option for those who want to change up their car every few years, or don’t want the hassle of having to sell it when they want a new one, or don’t want to pay a high car loan repayment each month.
But, as great as leasing sounds, we need to know: Does leasing a car build credit?!
Does leasing a car build credit?
In a nutshell: Yes. Leasing a car can build credit. However, leasing a car can also ruin your credit score.
We’ll get into the details about how leasing a car builds credit in a second. For now, let’s quickly unpack why leasing a car can build but also ruin your credit score.
When you take out a lease on a car, as we’ve established, you have to pay it off in regular, monthly instalments. Depending on the leasing company you use, these payments should get reported to the three main credit bureaus: Experian, Equifax, and TransUnion. So, if you make your payments on time each month, your score will improve. If, however, you miss a payment or you’re late with one, your score will bomb.
“As long as your leasing company reports to all three credit bureaus — Experian, Equifax, and TransUnion — and all your payments are made in a timely manner, an auto lease can certainly help to build or establish your credit history.” – Experian, Does Leasing a Car Build Credit?
So, we now know why leasing a car can build credit, let’s get into how it all works a little more.
How does leasing a car build credit?
Your credit score is generated using a number of different factors:
The length of your credit history
The number of accounts you have
The types of accounts you have
Your used credit vs. your available credit
Your payment history
Your payment history, which looks at all the on-time, missed, and late regular payments that you’ve made in the past (and are currently making), makes up 35% of your credit score. Your payment history has the biggest impact on your credit score, so if you want to maintain or see your credit score increase it’s imperative that you keep up with your car lease payments each month.
“By simply staying current on your car lease, you’re boosting the biggest component of your credit score.” – Auto Credit Express, Is Leasing a Car Good for Your Credit?
But it’s not all sweetness and light. There are several things to consider before you make the leap to leasing a car to build your credit score.
8 things to consider before leasing a car to build credit
Making the decision to lease a car is a big one. It’s a long-term contract for a start, so it’s a massive commitment. But if you’re planning to lease a car to build credit there are eight things to consider before you take a trip to your local car showroom.
Does leasing a car build credit? Consideration #1: You could ruin your credit score 🆘
We’ve covered this already, but it’s worth saying again: Regardless of the reason, whether it was your fault or not, if you’re late with a payment or you miss it altogether, you will damage your credit score.
Does leasing a car build credit? Consideration #2: Your payments might not get reported 📰
This was news to me, but car dealers, lenders, and auto manufacturers don’t have to report your monthly payments to the three main credit bureaus. As this is the only way your credit score will improve, be careful about who you choose to lease your car from. It’s definitely something to ask before you sign your lease agreement.
Does leasing a car build credit? Consideration #3: Your credit score might drop initially ⏬
When you enter into a lease agreement, your credit is likely to drop initially. This is because you’ve opened a new account and new credit accounts are scored lower than old, existing credit accounts. It will rise over time, but it’s something to be aware of.
Does leasing a car build credit? Consideration #4: Getting the best deal could harm your score 😩
When you’re looking to lease a car, it’s normal to want to shop around to get the best deal. But, if you have several inquiries on your credit report when you’re trying to get approved for a lease, your credit score might take a short-term hit.
Does leasing a car build credit? Consideration #5: You can’t pay it off early 💵
I always thought that paying off a lease early was a good thing. I thought it showed that you had a healthy bank balance! But no. Paying off a lease early will damage your credit score because the account will be reported as a closed account. This will look bad on your credit report because it looks similar to when a creditor allows you to pay less on a debt to close it. Plus, if you break your lease, it will remain as a negative account on your report for several years.
Does leasing a car build credit? Consideration #6: You might struggle to get a mortgage 🏡
If you’re planning to buy a house at the same time as taking out a lease on a car, you might struggle to get approved for a mortgage. Mortgage lenders will look at the amount you’re paying out each month, so your lease payments may count against you when a lender is deciding whether your income is enough to allow you to comfortably pay your mortgage payments each month.
“Borrowers with too much debt are viewed as a risk and can be turned down, even with a good credit score.” – Budgeting the Nest, Does a Vehicle Lease Show on Your Credit Report?
Does leasing a car build credit? Consideration #7: You’ll pay more than you think 💰💰
I touched on this earlier, but if you lease a car, you’ll end up paying more for it than you would if you bought it outright. When the lease is up, you’ll probably get stung with a repair bill for any small dents, dings or small scratches. You’ll have to foot the bill for any modifications you’ve made to the car, and also things like maintenance and taxes will need to be considered. Basically, the car will need to be returned as if you’ve just driven it off the forecourt. Good luck with that!
Does leasing a car build credit? Consideration #8: You might not be approved for a lease ✅
Usually, you’ll need a credit score of 680 or above before you’re able to get a decent car lease offer. Car leasing companies tend to go for low-risk customers who have a good credit score. So, if you have a bad credit score and are looking to lease a car to build it, you might struggle to find one with favourable terms.
This final consideration leads me, quite nicely, onto…
An alternative way to build your credit score
“Auto leasing companies generally look for consumers who have good credit or better, so it'll be challenging to lease a car with bad credit.” – Experian, Does Leasing a Car Build Credit?
If you have a low credit score, you might find it hard to secure a good car lease deal. In fact, it’s actually easier to secure a car loan than it is to get a car lease:
“As surprising as it is, you’ll have an easier time securing a car loan than a lease, Experian explains.” – Motor Biscuit, Does Leasing a Car Help Your Credit Score?
But car loans tend to demand high-interest rates and higher monthly repayments.
So, what’s the alternative?
A credit builder app like Grow Credit
As we established earlier, your payment history has the biggest influence on your credit score. It, therefore, makes sense that to build your credit score, you should start making regular monthly payments. And, although leasing a car is one way to do this, if you’re struggling to get approved for a lease, using a credit building app like Grow Credit might be for you.
How & why Grow Credit works to build credit
Grow Credit is a credit builder app that’s been specifically designed to help you grow your credit score. It allows you to pay for your monthly subscriptions directly through the app. The app then sends this payment evidence to the three main credit agencies and your credit score will start to grow within three months.
It works like this:
1. You apply for a Grow Credit interest-free Mastercard. This card is for people with low credit scores, so you will be approved.
2. Connect your Grow Credit Mastercard to your bank account.
3. Out of a list of 100 subscriptions, which include Netflix, Spotify, and Disney+, select the subscriptions you’d like to set up payments for.
4. Add your Grow Credit Mastercard details to these subscriptions and you’ll then start paying for them through Grow Credit.
Grow Credit is completely free and it’s one of the only credit builder apps that has no hidden fees, no interest to pay, no APR and no exit charges.
To find out more, visit the website or watch this video:
Or, if Grow Credit sounds like it’s for you, click here to get started right now.
Conclusion
So, does leasing a car build credit? The short answer is YES.
However, leasing a car can be a risky road to take if you’re struggling with your credit score, and it isn’t as straightforward as you might think. Your payments might not get reported to the three credit bureaus. Shopping around for the best deal or missing a payment could harm your score. You’re tied in for the duration of the contract as paying it off early will reflect badly on your credit report for years. You’ll end up paying more than you think to lease a car, you might not get a mortgage if you go for a car lease at the same time, and you might not even get approved for a car lease if you have a poor credit score.
There are many alternatives to leasing a car to build credit, but a sure-fire way to do it is to improve your payment history. Pay for your monthly subscriptions through a credit builder app like Grow Credit: It’s free, you’re guaranteed to get approved, and your score will start to increase in around three months.