Leasing a car can be a good way to improve your credit score. However, credit score improvement takes time, and getting a new lease may actually harm your score at first. If you can demonstrate to lenders that you can handle your lease payments responsibly, your lease should reflect well in your credit report over time.
A lease is essentially the same from a credit standpoint as a car loan. When you lease a car, you agree to pay a certain amount every month until the term of the lease expires, typically around three years. Since fully 35 percent of your FICO credit score comes from your payment history, leasing a car can have a significant impact on your credit score. If you make all of your lease payments on time, your credit score should improve. However, if you miss a payment, your score will be damaged, just as it will on any other type of loan. The longer you successfully make your timely lease payments, the greater the effect it will have on your credit score.
Amount of Payments
When you take out a lease, your creditor typically reports how much you owe the leasing company over the period of the lease, which can be a significant number. Car leases are reported as installment accounts on credit reports and are treated differently than revolving accounts, such as credit cards. Your credit score takes into account the fact that your installment account will be paid over time with regular payments. While 30 percent of your FICO score comes under the category of "amounts owed," a significant part of this comes from the percentage of revolving credit you are using, known as your revolving credit utilization. However, your credit score will improve the more you pay down the amount of your outstanding lease.
Because a car lease is an installment account, it may improve your score just by appearing on your credit report. The type of credit you use counts for 10 percent of your FICO score. You get more credit for varying the types of accounts you open. For example, if the only debt you have is revolving credit card debt, adding an installment account to your credit history will improve your credit mix and raise your credit score.
The remaining 25 percent of your FICO score consists of the length of your credit history and the amount of new accounts or inquiries you have. Taking on a new car lease could hurt both of these components. Your FICO score tends to go down if you open new accounts or request new credit, both of which will occur if you apply for and get a car lease. However, over time the effect of these negatives will diminish. New credit inquiries drop off your report after just two years, and they no longer affect you FICO score after one year. Your accounts will naturally age and improve your score the longer you make timely payments on your car lease.
After receiving a Bachelor of Arts in English from UCLA, John Csiszar earned a Certified Financial Planner designation and served 18 years as an investment adviser. Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications.