Does a Car Loan Affect Your Credit Score?

Applying for Car Loans Affects Your Credit Score

Getting a car loan generally affects your credit score. The question is how it does so. Depending on how you approach the process, you can minimize credit score risks. Smart consumers understand that they need to shop around to find the best deal on an auto loan, but they also understand the rules of the game. They know the strategies credit bureaus employ in order to calculate credit scores. Understanding the right way to go about searching, comparing, and selecting an auto loan lender can mean the difference between a boost and a detriment to your credit score.

Soft Pulls v. Hard Inquiries

In order to offer you an auto loan, lenders must first evaluate your credit information. Your credit score will determine the interest rate your lender believes reflects your demonstrated level of credit risk. Consequently, car loan applications require that consumers release their credit information to auto loan lenders for evaluation.

Initially, your lender may simply ask to pull your credit score alone in order to quote an estimate of what rate you can expect. This is called a soft pull. It is generally good for 45 days and does not negatively affect your credit score. However, in order to approve and actually offer you a loan, potential lenders need to review the specific details of your credit history. This will require a “hard inquiry,” and consumers need to be mindful of the number of “hard inquiries” they authorize when getting a car loan.

How Do I Minimize Potentially Negative Impacts of Auto Loans on My Credit Score?

FICO (Fair Isaac & Co) sets protocol for evaluating credit scores among the major credit bureaus. FICO acknowledges that consumers who frequently apply for new lines of credit (whether those lines are auto loans, home mortgages, or personal credit cards) also tend to be high-risk borrowers. However, FICO also understands that smart buyers shop around until they feel they’ve found the best deal on a loan that the market has to offer. In order to reconcile these competing realities, FICO has adopted a policy of “consolidating” lender inquiries into consumer credit scores.

First of all, your credit score will ignore all lender requests for information made within the last 30 days. This gives consumers who are serious about buying a month-long window to execute their loan free of reprisal. But let’s say you still haven’t found the right deal, and month three is rolling around. In this situation, all information requests older than 30 days are consolidated into a single request within a “shopping period.” The newest version of FICO calculations regards 45 days as a shopping period; older versions limit consolidation to any 14-day span. Your lending institution will select the version of its choice. To minimize the negative impact on your credit score, avoid authorizing hard inquiries until you are serious about buying within the next month.