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Each car loan you apply for creates a “hard” credit inquiry on your credit report. Hard inquiries slightly harm your credit score.
The credit bureaus will recognize when a consumer is “shopping around” for a car loan. If multiple inquiries occur before a 14 to 45-day period, they merge into a single credit report inquiry.
How Multiple Car Loan Applications Affect Your Credit Score
The average new car price in the U.S. now exceeds $46,000 and the prices of used vehicles have surged by more than 25%. The result is that more Americans have massive car loans.
Car loan affordability is particularly a concern for those with bad credit. These individuals pay higher interest rates on their car loans.
Shopping around to find an auto loan with affordable rates is smart. Yet, lenders each perform a credit check, which adds a hard credit inquiry to your credit report.
Hard credit inquiries generally cause your credit score to drop by a few points. Having several hard inquiries in a short time may have a more adverse effect.
Lenders often perceive those with several recent hard credit inquiries as risky. Applying for many new credit accounts may suggest that sudden financial problems exist.
Hard inquiries remain visible on your credit report for two years. FICO is the leading credit scoring model in the market today.
FICO estimates that one hard inquiry often creates a five-point drop in credit scores. FICO only considers inquiries from the past 12 months in its score calculations.
The credit bureaus and FICO recognize that consumers often “shop around” for loan rates. Thus, the scoring models will merge or consolidate several inquiries into one for mortgage or car loan applications.
Older FICO models combined inquiries within two weeks. The newest FICO models allow for a 45-day window.
The Impact Rate Shopping Has on Your Credit Score
Rate shopping involves checking with more than one source for a loan, credit card, or other accounts. The process of rate shopping is helpful because you find out the interest rates you qualify for.
The downside to rate shopping is that these lenders conduct a hard credit inquiry or “pull.” Hard credit inquiries have a small negative impact on your credit score.
Hard inquiries are distinct from “soft” credit inquiries. A soft credit inquiry may occur when you review your own credit report. Businesses also often perform soft credit inquiries when creating lists for marketing campaigns.
The way a hard credit inquiry impacts your credit score varies based on your credit history. Credit score statistics show that a single hard inquiry equates to a 5 point decline in your score.
Hard inquiries have the largest impact on consumers with very limited credit histories. Here, you have fewer other account activities available for calculating a score.
FICO found that consumers with six or more hard credit inquiries on their report are eight times more likely to file for bankruptcy. New credit accounts also have up to a 10% influence on your FICO score.
How to Rate Shop the Right Way
Next, we will review some of the best practices when rate shopping.
Check Your Credit Before You Apply for a Loan
Consumers are eligible for a free copy of their credit report each year. Most experts and credit building apps recommend checking your report before rate shopping.
Review your credit history for any errors that might be harming your credit score. You can file a dispute with any of the three credit bureaus online.
Reviewing your credit report might potentially detect fraudulent activity. Although you can’t increase credit score overnight, you will at least know where you stand. Further, you can take interim measures for improving your score.
Research Lenders Before You Apply
Being prepared is important when buying a car. Those who fail to plan ahead often find themselves with less favorable car loans.
Car loans are available through banks, credit unions, online lenders, dealerships, and more. Those with bad credit might find fewer loan options.
Research lenders online through customer reviews, the Better Business Bureau, and other resources. If you are buying a vehicle from a private seller, be sure the lender finances these transactions.
Consider getting pre-approved for a car loan. A pre-approval provides you with some insight into your price range. If you are shopping at a dealership with a pre-approval, ask if they have a relationship with a lender that might have better rates.
Apply for Only One Loan Type at a Time
Multiple car loan inquiries in a short window of time merge into one inquiry. Yet, this process of combining several inquiries is inapplicable to credit cards.
If you are rate shopping for car loans, avoid also doing so for other types of credit accounts. For example, avoid rate shopping for a home mortgage during the same period as a car loan. Here, the other type of credit account inquiries will appear separately.
Some of the websites today are platforms for comparing rates between several lenders. Bear in mind that you might receive marketing phone calls, texts, and emails for several days. Thus, you might consider “opting out” when this option exists.
Make Sure to Complete Rate-Shopping in a Short Period of Time
When rate shopping, you should complete the process in 14 days or less. Credit scoring models merge or consolidate hard credit inquiries for periods ranging from 14 to 45 days.
According to FICO, roughly 90% of lenders rely on their models for credit scores. VantageScore, a competing model, has a significantly smaller market share.
The most recent FICO models now allow a 45-day window. Yet, some of the older FICO models still have a 14-day limitation. VantageScore still currently uses only a 14-day window for merging inquiries.
New credit accounts have up to a 10% influence on credit scores using the FICO scoring models. VantageScore also acknowledges recent inquiries; yet, they consider them “less influential.”
Do Multiple Auto Loan Inquiries Count as One?
Each time a potential lender performs a credit check for an auto loan, it creates a hard credit inquiry. Each hard credit inquiry usually will cause your credit score to decline by a few points.
Multiple lender inquiries for a car loan will merge into one inquiry on your credit report. Yet, these credit checks must all occur within the same limited time frame.
The two primary credit scoring models used today are FICO and VantageScore. The most recent FICO scoring models will combine all these car loan entries up to a 45-day limit. The VantageScore model has a much smaller “window” of only 14 days.
How Many Inquiries Are Too Many for a Car Loan?
There are two types of credit inquiries that appear on consumer credit reports. Soft credit inquiries are usually the result of a consumer checking their credit.
Soft credit report entries have no adverse impact on credit scores. A hard credit inquiry occurs when lenders check your credit and do hinder your credit score.
Fortunately, all hard inquiries that occur within a 14-day period will merge into one. This applies regardless of the number of inquiries.
Do Multiple Car Loans Affect Credit Scores?
If you have one car loan already, a potential lender might hesitate to approve you for a second car loan. This concern involves your debt-to-income ratio. Here, lenders assess affordability. Is your current income sufficient for making the second monthly car payment?
If you have ample income to afford a second car loan and it is within the same time period as when you acquired the first car loan, then your credit score should remain unaffected. Maintaining a positive payment history on all credit accounts is key.
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Anthony Amodeo is a regular finance writer in both business-to-business and business-to-consumer industries. Particular areas of focus include personal finance, small business, real estate, and more. He is a graduate of Kent State University. His credit scores are top tier.