Does Applying for a Car Loan Hurt Your Credit?

Applying for a car loan often raises questions about its potential impact on your creditworthiness. Your credit score, a numerical representation of your credit risk, is affected by your borrowing and repayment behaviors. Understanding these implications is key to making informed decisions about new credit, including an auto loan.

Credit Inquiries and Your Score

When you apply for a car loan, lenders perform a “hard inquiry” on your credit report. This occurs as they review your credit history to assess your creditworthiness. A hard inquiry may cause a temporary, slight dip in your credit score, usually by fewer than five points. While the inquiry remains on your credit report for up to two years, its effect typically diminishes significantly after 12 months.

How a New Car Loan Affects Your Credit

Once a car loan is approved, its presence on your credit report influences your score. A car loan is an installment loan, meaning you borrow a fixed amount and repay it over a set period. Unlike revolving credit, such as credit cards, installment loans do not directly factor into your credit utilization ratio. However, the overall increase in your debt load can be considered by lenders.

A new installment loan can positively contribute to your credit mix, which accounts for about 10% of your FICO score. Lenders favor seeing a diverse range of credit types. However, opening a new account can also slightly reduce the average age of your credit accounts.

The most substantial effect comes from your payment history, which is the most significant factor, accounting for 35% of your FICO score. Consistently making on-time payments improves your score over the loan’s term. Conversely, missed or late payments severely harm your score and remain on your report for years.

Navigating the Application Process

When applying for a car loan, understand the “rate shopping window” to minimize potential negative credit impacts. Credit scoring models recognize that consumers shop around for the best loan terms. Multiple hard inquiries for the same type of loan, such as auto loans, within a specific timeframe are treated as a single inquiry.

This shopping window can vary, generally ranging from 14 to 45 days, depending on the credit scoring model. To ensure inquiries are grouped, complete all loan applications within a shorter period, such as 14 days, as most models recognize this timeframe. This strategy allows you to compare offers from multiple lenders without incurring multiple negative impacts on your score.

Before applying, check your credit report. You can obtain a free copy from each of the three major credit bureaus annually. Reviewing your report allows you to identify and dispute inaccuracies, which could affect your score and loan eligibility.