Does Leasing a Car Build Credit?

How Leasing a Car Can Help You Build Credit

An auto lease typically appears on your credit report as an installment loan and can contribute to your credit history either positively or negatively.

Making on-time lease payments can benefit your credit scores as long as your leasing company reports your account to the three national consumer credit bureaus—Experian, TransUnion and Equifax. After your lease ends, that positive payment history can remain on your credit reports for up to 10 years.

Adding an installment loan could also improve your credit mix, which refers to your mix of open installment and revolving credit accounts. Although credit mix is less important to your credit scores than payment history, a diverse credit profile generally has a positive impact.

Can Leasing a Car Hurt Your Credit?

An auto lease can also hurt your credit if you miss a payment or default on the lease. Payments that are 30 days late or more are reported to credit bureaus and negatively affect your credit score. More serious delinquencies, such as accounts sent to collections, can compound the damage. Late payments can stay on your credit report for seven years from the original missed payment date.

Applying for a car lease typically generates a hard inquiry into your credit, which can cause a slight, temporary dip in your credit scores. The impact is usually minimal and diminishes over time if you manage your credit responsibly.

Auto lease calculator

What Credit Score Is Needed to Lease a Car?

There's no universal minimum credit score required to lease a vehicle; each lender or dealership has its own criteria. However, you're generally more likely to be approved for favorable lease terms and lower payments if you have good credit or better (a FICO^® Score^Θ of 670 and above).

You may be able to lease a car with bad credit, but this could require a higher monthly payment or a bigger down payment.

Improving your credit, paying down debt to improve your debt-to-income ratio or asking a family member or friend with good credit to cosign the lease could increase your odds of approval. Since the cosigner is responsible for the payments if you can't make them, it's important for the cosigner to be aware of potential risks to their credit.

Learn more: Can You Lease a Car With Bad Credit?

Is It Better to Lease or Buy a Car?

Leasing a car usually means lower monthly payments, but buying may cost less overall if you keep the car for the long term. Whether buying or leasing a car is best for you depends on your budget, driving habits and how long you expect to keep the vehicle.

When It May Be Better to Lease a Car

Leasing a car may make sense if:

• You prefer to drive a newer car. Leasing makes it easy to switch to a newer model every few years without the hassle of selling or trading in your old car.
• You want a lower payment. Lease payments are typically lower than auto loan payments because you're paying for the vehicle's depreciation during the lease term, not its full purchase price. Down payments are generally lower too.
• You don't drive many miles. Leases generally restrict your annual mileage and charge a fee for each mile over that limit. Lease limits typically range from 10,000 to 15,000 miles annually, so leasing is best if you won't exceed these limits.
• You want minimal repair costs. Although you're still responsible for routine maintenance of your leased vehicle, new cars usually don't need major repairs or costly maintenance during the first few years. Leased cars are often covered by the manufacturer's warranty during the lease term.

When It May Be Better to Buy a Car

You may want to buy a car if:

• You plan to keep the car for a long time. Once your car loan is paid off, you can keep driving without a monthly payment.
• You put a lot of miles on your vehicle. If you have a long commute or enjoy road trips, buying helps you avoid fees for mileage overages or excessive wear and tear on the car.
• You want the option to customize your car. Leased cars can't be modified, but if you own the car, you can make performance or cosmetic upgrades as you like.
• You want the chance to build equity in the car. As you pay down your loan, you may start building equity—the difference between the car's value and your loan balance. When you're ready to sell the car, you can put that equity toward your next vehicle or use it for something else.

How to Lease a Car

Follow these steps to lease a car.

1. Set a budget. Determine your ideal monthly payment, reviewing your budget and factoring in the cost of insurance, sales taxes, fuel and other car-related expenses. Also calculate how much you can afford for a down payment.
2. Check your credit. Review your credit report and credit scores before you shop.
3. Determine a mileage limit. Assess how much you drive annually to help choose a realistic mileage limit. Adding some extra mileage to your estimate can help you avoid additional charges for going over your limit.
4. Decide on a vehicle. Look for a car that holds its value well. Since lease payments are based on depreciation, vehicles with higher residual value at the end of the lease generally have lower monthly payments.
5. Research lease offers. Compare terms, mileage limits, upfront costs and end-of-lease fees. Look for lease incentives such as rebates or discounts.
6. Estimate your payment. Use the auto lease calculator above to see how different down payments, lease terms and credit score ranges may impact your payments.
7. Negotiate the terms. You can generally negotiate the vehicle's price, down payment, mileage limits, the value of any trade-in vehicle and the money factor (the lease's equivalent of an interest rate). Be sure you understand early termination fees, excess mileage charges, wear-and-tear rules and your options for purchasing the vehicle when the lease is up.
8. Review the contract carefully. Before signing, make sure the contract matches the terms you agreed on.
9. Make your payments on time. Timely payments on your auto lease can benefit your credit scores. Consider setting up automatic payments to ensure you don't miss a due date.

Learn more: How Does Leasing a Car Work?

The Bottom Line

Leasing a car can help you build credit if you make all your payments on time. Because leasing often requires good to excellent credit to qualify for the best terms, it's a good idea to check your credit before applying to see if it could benefit from improvement. You can check your credit scores for free from Experian.

As you work on improving your credit score, consider signing up for free credit monitoring from Experian. You'll be able to track your FICO^® Score progress and get updates of important changes to your credit that could impact your ability to get an auto lease.