Does Running Your Credit for a Car Hurt Your Credit?

When considering a car purchase, many individuals wonder about the effect of credit checks on their financial standing. Understanding how credit inquiries function is an important step in navigating the auto loan process. Your credit score plays a significant role in determining the interest rates and terms you are offered. This knowledge can help you make strategic decisions as you seek vehicle financing.

Different Types of Credit Checks

Credit checks are categorized into two main types: soft inquiries and hard inquiries. A soft inquiry, sometimes called a soft pull, occurs when a person or company checks your credit without a formal credit application. Examples include checking your own credit score, pre-qualifying for a loan offer, or when an employer conducts a background check. Soft inquiries do not impact your credit score and are generally only visible to you on your credit report.

In contrast, a hard inquiry, also known as a hard pull or hard credit check, happens when a lender formally reviews your credit report in response to a credit application. This occurs when you apply for a new credit card, a mortgage, or an auto loan. Lenders typically require your consent before performing a hard inquiry. These inquiries are recorded on your credit report and can be seen by other lenders.

How Credit Inquiries Affect Your Score

Hard inquiries can cause a slight, temporary decrease in your credit score. For most individuals, a single hard inquiry will typically lower a FICO Score by fewer than five points. The exact impact varies with credit history. Hard inquiries remain on your credit report for up to two years, but their influence on your score usually diminishes after a few months.

The impact of hard inquiries is generally considered a minor factor in credit scoring models, accounting for about 10% of a FICO Score. Multiple hard inquiries within a short period can have a compounding effect, signaling to lenders that you may be seeking too much new credit, which could indicate higher risk. However, this concern is mitigated for specific types of loans due to special rules designed for rate shopping.

Car Loan Rate Shopping Rules

Credit scoring models incorporate special provisions for rate shopping, particularly for significant loans such as auto loans, mortgages, and student loans. Multiple hard inquiries for the same type of loan within a concentrated period are often treated as a single inquiry. This rule allows consumers to compare loan offers from various lenders without their credit score being penalized for each individual inquiry.

The timeframe for this rate shopping window varies depending on the credit scoring model used. For FICO Scores, this period can range from 14 to 45 days, with newer versions typically allowing a 45-day window. VantageScore models often use a 14-day window. If all auto loan applications are submitted within this designated period, they will generally count as one inquiry for scoring purposes, minimizing the impact on your credit score.

Smart Steps Before Applying

Before formally applying for a car loan, it is advisable to check your own credit report and score. Accessing your own credit information is a soft inquiry and will not negatively affect your score. Reviewing your report allows you to identify and dispute any errors or inaccuracies that could be impacting your score.

Consider obtaining a pre-qualification or pre-approval from lenders. Pre-qualification typically involves a soft inquiry and provides an estimate of the loan amount and interest rate you might receive. This allows you to compare potential terms from different financial institutions without impacting your credit score. Once you are ready to proceed, submit all your loan applications within the rate shopping window to ensure multiple inquiries are grouped as a single event.