When you lease a vehicle, you agree to pay a certain amount each month for a specified period of the time. Vehicle leases are an alternative to buying a car, but the credit requirements are similar. These leases appear on your credit report. Depending on your circumstances, this can have a positive or negative impact on your credit score.
Vehicle leases are reported to credit bureaus in the same fashion as car loans. Leases appear on your credit report as installment loans, under the installment account section. They aren't identified as leases and appear just like auto loans. The balance reported as the amount you owe is the vehicle's full sale price. Your credit report may also include the amount left to pay and the number of months remaining on the lease.
Debt and Income
Leasing a vehicle affects your debt-to-income ratio. Creditors assess the amount of debt you carry compared with your income to determine if you can afford another payment obligation. If you are in the market for a new home, you might want to hold off on leasing a vehicle until after you're approved for the mortgage. Borrowers with too much debt are viewed as a risk and can be turned down, even with a good credit score.
Positive Effect on Credit
Paying the lease on time each month will have a positive impact on your credit score. Payment history is 35 percent of your FICO credit score, according to the website MyFICO. A consistent payment history will help boost your credit score during the lease. If you have limited credit history, leasing a vehicle helps you establish credit.
Negative Impact on Credit
If you have too much debt, the lease can increase your credit-utilization ratio. This ratio is the balance you carry on your lines of credit. A common misconception is that the utilization ratio is only calculated using your credit cards. However, the ratio is determined by the balance on your revolving and installment accounts. If you break the lease agreement, it will appear on your credit report as a negative account and can remain on your report for seven years. Opening a new account can also temporarily lower your score. New credit is scored lower than older, existing credit accounts.
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