Does a Car Lease Affect Your Credit Score?

A car lease is a financial agreement that allows you to use a vehicle for a set period in exchange for regular payments. Just like other financial products, a car lease can influence your credit standing, potentially creating both positive and negative impacts. Understanding these effects is important for managing your financial health.

Initial Credit Impact of Applying

When you apply for a car lease, the leasing company or dealership typically performs a “hard inquiry” on your credit report to assess your creditworthiness. This can cause a small, temporary dip in your credit score, usually by a few points, but its impact generally diminishes over a few months and typically disappears from your credit report within two years.

Once approved, the lease is recorded on your credit report as a new account. This new tradeline can temporarily lower the “average age of accounts” in your credit profile, which is a factor that credit scoring models consider and can have a minor, short-term effect on your score.

Ongoing Credit Impact During the Lease

A car lease appears on your credit report as an installment account. The most significant factor influencing your credit score during the lease term is your payment history. Making all monthly lease payments on time can help build a positive payment history, which accounts for a substantial portion (around 35%) of your FICO score.

Conversely, late or missed payments can severely damage your credit score. A single payment reported 30 days or more past its due date can negatively impact your credit and remain on your credit report for up to seven years. The lease also contributes to your “credit mix,” which refers to the different types of credit accounts you manage. Adding an installment account like a car lease to a credit profile that might primarily consist of revolving credit, such as credit cards, can demonstrate your ability to handle various forms of debt responsibly, potentially improving your credit mix.

The “length of credit history” is another factor that plays a role, as the lease account ages on your report. While credit utilization is a significant factor for revolving credit, it is generally not a direct factor for installment accounts like leases in the same way. However, having a lease payment increases your overall debt obligations, which can be considered by lenders when assessing your overall financial picture, particularly your debt-to-income ratio.

Credit Implications at Lease End

Actions taken at the conclusion of a car lease can also affect your credit score. If you fulfill all the terms of your lease agreement, such as returning the vehicle without excessive mileage or wear and tear, and pay any remaining fees, this responsible completion can finalize the positive credit history built throughout the lease term.

However, if you incur end-of-lease fees, such as for exceeding mileage limits or for damages beyond normal wear, and these fees remain unpaid, they can negatively affect your credit. Unpaid fees, if sent to collections, can result in a significant drop in your credit score and remain on your credit report for up to seven years. Similarly, if you default on the lease by stopping payments and keeping the vehicle, it can lead to a severe credit score reduction and potentially a repossession on your credit report.

Leasing Versus Buying: Credit Score Differences

Both car leases and car loans appear on your credit report and can influence your credit score. A car loan is typically an installment loan where you borrow a specific amount to purchase the vehicle, and the principal balance decreases with each payment. This type of loan directly affects “debt utilization” as the outstanding balance is tracked and reduced over time.

In contrast, a car lease is also reported as an installment account, but you are essentially paying for the depreciation of the vehicle during the lease term, not its full purchase price. Therefore, there isn’t a principal balance that decreases in the same manner as a loan, and it does not directly impact “credit utilization” in the way revolving credit or traditional installment loans do. However, both lease and loan payments contribute to your overall debt obligations, which lenders consider when evaluating your “debt-to-income” ratio, a measure of your monthly debt payments compared to your gross monthly income. Both financing options require consistent, on-time payments to build a positive credit history.