Does Getting Preapproved for a Car Hurt Credit?

Getting pre-approved for a car loan is a common step in the vehicle purchasing process. This action typically involves a credit inquiry, which can lead to a slight, temporary adjustment in a credit score. This is a normal part of how lenders assess a borrower’s financial standing and willingness to repay a loan.

Credit Inquiry Fundamentals

When a lender accesses an individual’s credit information, it results in a credit inquiry, which can be categorized into two main types: soft inquiries and hard inquiries. Understanding the distinction between these can clarify how credit checks influence a financial profile.

Soft inquiries occur when a person checks their own credit report or when a potential lender pre-screens an individual for promotional offers without a formal application. These inquiries are visible only to the individual checking their own report and do not impact credit scores.

Conversely, hard inquiries happen when an individual formally applies for new credit, such as a loan or a credit card. They can cause a small, temporary reduction in a credit score. While a hard inquiry remains on a credit report for up to two years, its effect on a credit score usually diminishes after about 12 months.

Pre-Approval’s Effect on Credit

Obtaining pre-approval for an auto loan generally results in a hard credit inquiry. This allows lenders to review a credit file to determine creditworthiness and potential risk. The impact on a credit score from such an inquiry is typically minor, often reducing it by fewer than five points.

Credit scoring models, such as FICO and VantageScore, recognize that consumers often shop for the best rates when seeking a major loan. To accommodate this, these models treat multiple hard inquiries for the same type of loan within a specific timeframe as a single inquiry. For FICO scores, this rate shopping window can range from 14 to 45 days, with newer versions often allowing up to 45 days. VantageScore models typically use a 14-day rolling window for grouping inquiries for auto or mortgage loans.

Optimizing Credit for Car Purchases

To minimize the impact of credit inquiries during the car buying process, it is beneficial to concentrate all loan applications within the established rate shopping window. Aiming to complete all applications within a 14-day period is a cautious approach, as it accommodates both FICO’s older models and VantageScore’s typical window.

Before beginning the loan application process, it is advisable to review one’s credit report for any inaccuracies. Individuals are entitled to a free copy of their credit report annually from each of the three major credit reporting agencies. Identifying and disputing errors on these reports can help ensure that the credit profile presented to lenders is accurate.

Maintaining a healthy credit profile through consistent responsible financial habits also supports securing favorable loan terms. This includes consistently paying bills on time, which is a significant factor in credit scoring. Keeping credit card balances low relative to credit limits, known as credit utilization, also positively influences credit scores. Managing various types of credit responsibly can further strengthen a credit profile.