How Many Hard Inquiries When Buying a Car?
Understand how credit inquiries for car loans are grouped, allowing you to shop for financing rates with minimal credit impact.
When seeking financing for significant purchases, such as an automobile, consumers often encounter the concept of a “hard inquiry” on their credit report. Understanding how these inquiries function is important for anyone considering a car loan.
Understanding Hard Inquiries
A hard inquiry occurs when a lender or creditor reviews an individual’s credit report in response to an application for new credit. This could involve applying for a car loan, a mortgage, a personal loan, or a new credit card. The primary purpose of a hard inquiry is to evaluate the applicant’s financial history and ability to manage debt responsibly. These inquiries are authorized by the applicant as part of the credit application process.
In contrast, a soft inquiry does not impact an individual’s credit score. Soft inquiries may occur when someone checks their own credit report or when a potential lender pre-approves an offer of credit. Hard inquiries, however, indicate a consumer is actively seeking additional credit.
Hard inquiries remain visible on a credit report for up to two years from the date of the inquiry. Their influence on credit scoring models diminishes over time. Lenders viewing a credit report can see these inquiries, reflecting recent credit-seeking behavior.
Impact on Your Credit Score
A single hard inquiry results in a small and temporary reduction in a credit score. This dip is only a few points, and its effect lessens significantly over a few months. Most credit scoring models, such as FICO and VantageScore, consider recent inquiries more heavily than older ones. The impact of a hard inquiry on a credit score fades entirely within about one year, even though the inquiry remains on the report for longer.
The overall influence of hard inquiries on a credit score is minor compared to other factors. Payment history and credit utilization have a much greater bearing on a credit score. While hard inquiries are a factor, they are not the primary determinant of credit health. Multiple inquiries over a short period can signal higher risk, subject to specific rules for certain loan types.
Special Rules for Car Loan Inquiries
Credit scoring models acknowledge that consumers rate shop for significant loans like auto loans, mortgages, and student loans. To allow for this comparison without unduly penalizing a consumer’s credit score, these models employ special rules. Multiple hard inquiries for the same type of loan within a specific timeframe are treated as a single inquiry for scoring purposes.
The time window for this grouping varies by scoring model. For instance, newer FICO® Score versions treat multiple auto loan inquiries that occur within a 45-day period as one hard inquiry. Older FICO® Score versions use a shorter 14-day window. Some FICO models also ignore inquiries made in the 30 days prior to scoring for auto and mortgage loans.
VantageScore credit scores, another widely used model, treat multiple auto loan inquiries within a 14-day period as a single inquiry. This allows consumers to seek out the best interest rates and loan terms from various lenders. The rationale is that a consumer is looking for one car loan, not multiple, and is simply comparing offers.
While the credit report will show each individual inquiry, their impact on the credit score is consolidated into that of a single inquiry if they fall within the designated shopping window. It is advisable to complete all car loan applications within a concentrated period, ideally within 14 days, to ensure most scoring models group them together. This strategy helps minimize the collective impact on the credit score, allowing for effective rate shopping.
Reviewing Your Credit Report
After applying for a car loan, review your credit report. You are entitled to a free copy of your credit report every 12 months from each of the three major nationwide credit bureaus: Experian, Equifax, and TransUnion. These reports can be accessed through AnnualCreditReport.com. Regularly checking your reports helps you stay informed about your financial data.
When reviewing your credit report, focus on the inquiries section. Verify that all listed hard inquiries are accurate and that only those you authorized appear. Discrepancies, such as unauthorized inquiries, could indicate potential errors or even identity theft.
Should you identify any inaccuracies, you have the right to dispute them with the respective credit bureau. This process helps maintain the accuracy of your credit history. Monitoring your credit report ensures that the information lenders use to assess your creditworthiness is correct and up-to-date.