How Voluntary Termination Can Affect Your Credit Score

While it might seem like ending a finance agreement early would damage your credit, a Voluntary Termination itself doesn't lower your score. However, the process can leave a footprint on your report.

1. Missed Payments First: The most common damage to your credit score happens before termination. Any missed or late payments on the finance agreement are reported to credit agencies, directly lowering your score.
2. A Note on Your File: The VT is recorded on your credit file. It’s not a default, but it shows the account was settled voluntarily, not paid to term, which is visible to future lenders.
3. Future Lender Perception: Lenders reviewing your credit history will see the VT marker. Some creditors may view this as an increased risk, which could influence their decision to offer you credit in the future.
4. Potential for Rejection: If a lender denies a future credit application partly due to the VT marker, the hard inquiry from that application can cause a small, temporary dip in your credit score.
5. Disputes Over Damage: If you are charged for vehicle damage beyond fair wear and tear and fail to pay, this debt could be registered as a default, causing significant harm to your score.

How Much Will Voluntary Termination Affect Your Credit Score?

The impact of voluntary termination on your credit score isn't always straightforward. Here are a few key factors to consider when weighing your decision.

• Credit Report Marker: A voluntary termination is recorded on your credit file for six years. This notation informs future lenders that you ended a finance agreement ahead of schedule.
• No Direct Score Drop: The act of VT itself doesn't automatically reduce your credit score number. However, the marker can affect a lender's decision when you apply for credit later.
• Outstanding Debt: Any unpaid charges, like excess mileage fees, can negatively impact your score if not settled. These outstanding debts could be registered as a default on your credit file.

How You Can Avoid Voluntary Termination Affecting Your Credit Score

Settle the Remaining Balance

The most direct way to protect your credit is to pay the entire outstanding balance. Fulfilling the contract this way means the agreement is settled without default. This prevents any negative markers related to early termination from being reported to credit reference agencies.

Explore Refinancing Options

Consider refinancing the vehicle with a new loan from a different lender. This new loan pays off your original finance agreement, closing it on good terms. You then continue payments under the new contract, completely avoiding the voluntary termination process and its potential credit implications.

Ways to Improve Your Credit Score

Improving your credit score is an achievable goal, and with consistent, positive financial habits, you can enhance your creditworthiness. Your score is dynamic, meaning the actions you take can lead to meaningful changes over time.

• Monitor your credit reports. Regularly check your reports from all three major bureaus—Experian, TransUnion, and Equifax—to spot and dispute inaccuracies or signs of identity theft.
• Establish automatic bill payments. Since payment history is the most significant factor in your score, setting up automatic payments is a simple way to ensure you never miss a due date.
• Reduce your credit utilization. Aim to keep your credit card balances below 30% of your total available credit, as high utilization can negatively impact your score.
• Become an authorized user. Being added to a credit card account with a strong payment history and low utilization can help you build credit, provided the account reports to the credit bureaus.
• Diversify your credit mix. Lenders like to see that you can responsibly manage different types of credit, such as revolving credit (credit cards) and installment loans (auto loans or mortgages).
• Limit hard inquiries. Avoid applying for too many new credit accounts in a short period, as each application can result in a hard inquiry that temporarily lowers your score.

The Bottom Line

Voluntary Termination won't directly lower your credit score, but a marker on your credit file will be visible to future lenders, potentially influencing their decisions on future applications.

Frequently Asked Questions

Will voluntary termination always lower my credit score?

Not directly. The VT marker itself doesn't impact your score, but any missed payments before terminating the agreement will have a negative effect on your credit history.

How long does a voluntary termination stay on my credit report?

A voluntary termination will typically remain on your credit file for six years from the date the finance agreement is officially settled and closed by the lender.

Can I get car finance after a voluntary termination?

It's possible, but some lenders may view it as a higher risk. Your ability to get new finance will depend on the lender's criteria and your overall credit profile.