Will Applying for a Car Loan Hurt My Credit Score?

When you apply for auto financing, you will need to authorize a hard credit inquiry, and that inquiry will appear on your credit report. And, yes, your credit score will be negatively affected, but there won't be any significant or long-lasting damage.

 

Credit Inquiry Basics

 

Upon submitting an application for a credit card or loan, you grant a potential lender permission to ask or "inquire" for a copy of your credit report from a credit bureau. Lenders want to look at your credit history because they need to know whether or not you have been a responsible borrower.

 

This inquiry will then be documented on your report, and because there is a chance that the acquisition of new debt will compromise your ability to pay for existing debt, your credit score may drop a few points.

 

How many points will be subtracted? This largely depends on your existing credit history. Shorter histories containing fewer accounts are typically penalized more than established and varied files. Most applicants (according to Bankrate.com) lose between 1-5 points.

 

The Credit Impact of Multiple Inquiries

 

Multiple credit inquiries fall into 2 distinct categories. Have you applied for several different accounts in a relatively short span of time? Or, have you simply been "rate shopping," and applying with a few different lenders in order to get the best deal on a single purchase?

 

 

  • Trying to open multiple accounts at once can send up a red flag. Let's say, for example, you apply for 5 different credit cards, a car loan and a personal loan during the course of 1 month. You will be penalized for each of these inquiries because most credit scoring models are calibrated to reflect potential risk in this kind of behavior. Basically, taking on so much debt at one time makes you seem "desperate" for credit.
     
  • Most credit scoring models are lenient with rate shopping. According to FICO.com, multiple credit inquiries that are authorized for the same purpose will not count against the applicant. What does this mean? Well, if you need an auto loan, but you want to get the best interest rate possible, you may apply with several different lenders in order to compare loan terms. FICO reports that, as long as the inquiries attached to these loan applications are all made within 30 days, they will all count as a single inquiry.

 

Are there hard inquiries on your credit report that you didn't authorize? This could be an indication of identity theft. If you've been the victim of fraud or simply want to protect yourself from ever having your identity compromised, contact a reputable company that can provide the security you need.

 

The generally accepted rule is, "It takes credit to build credit." So, the small amount of credit score points that you may lose when applying for a loan are negligible, especially if you're dedicated to handling your payments responsibly, and using your loan as an opportunity to establish a good credit history.