How Much Will My Credit Score Drop If I Apply for a Car Loan?

Shopping for the best deal on a vehicle loan is smart, right? After all, for many of us, a loan to buy a car or truck will be one of our largest loans. Most of us (84%) rely on financing when purchasing a vehicle, according to data from Experian Automotive (fourth quarter, 2014) and the average loan amount for a new vehicle is $28,381; the highest on record and an increase of almost $1,000 from a year ago. In fact, the average monthly payment is now up to $482. Shaving even a percentage point off the interest rate on a car loan can mean decent savings.

But there is a hidden danger lurking in those applications for auto loans, as a number of our readers have discovered:

I purchased a new car the dealer ran me through 7 different banks to get me the best rate all inquiries are listed separately on my Trans Union report and I lost almost 60 points on my credit score. Is it possible to contact them and fix the inquiries to be only 1 inquiry? – “VStrigle”

I had my own financing lined up with lender I have done business with for over 7 years and I thought I was getting a good rate. Well the salesman at the dealer said he was 95% confident that he could get a much lower rate that what I was getting, so with hesitation, I decided to let him run my credit. I decided at the last minute not to purchase the car mainly because the salespeople were very pushy and they were not going to give me good offer on my car. Well 57 inquires later…(my credit scores dropped 40 – 60 points).- “ricky”

I went to one dealership who ran me against 19 lenders(seriously!). My score dropped 50 points by the next score reporting cycle. – “CE- Mpls”

A single credit inquiry generally has little impact on your credit scores. One inquiry might drop your score 2 to 7 points or so. And multiple inquiries created as a result of shopping for an auto loan are not supposed to hurt your credit scores significantly if you limit your shopping to a short window of time. VantageScore counts all inquiries within a 14-day rolling window as one. FICO scores contain a similar buffer except the window varies — sometimes it is 14 days and sometimes it is 45 days — depending on the FICO score model that is used. (In addition, with these FICO scores all auto-related inquiries in the past 30 days are ignored.)

So how is it that these consumers have seen their credit scores drop dramatically due to auto loan applications? One possible explanation is that the scores they are monitoring are not FICO or VantageScore credit scores, but instead are custom bureau scores or educational scores that do not include a buffer for inquiries. In those cases, if the consumer later applies for credit with a lender that uses FICO or VantageScore scores (most do), those inquiries will be “de-duped” so they are treated as a single inquiry.

Another possibility is that the inquiries are not properly identified as auto-related inquiries by the source, though that’s less likely. And still another possibility is that some of these consumers may have seen their credit scores through one source the first time and another source the second time. Finally, if a new auto loan had already been reported, that could affect their credit scores.

What Can You Do?

How can you protect your credit when you shop for an auto loan? It can be helpful to review your credit reports and credit scores before you go to the dealership, then apply for financing with a trusted lender in advance. (You can get a free credit report summary from Credit.com to see where you stand before you apply. Checking your own credit does not affect your scores in any way.) A credit union or local bank isn’t going to share your loan application with multiple lenders the way an auto dealer will. If you get pre-approved, you can simply tell the dealer you already have financing and don’t want them to pull your credit reports. Not only can this help you avoid possible damage from multiple inquiries, but it can also help you focus your negotiations with the dealer on the car and not the loan.

Getting inquiries removed can be tough. If you are confident you did not authorize a car dealer to access your credit reports, then you could dispute them as fraudulent or unauthorized. If you can’t get them removed, keep in mind that when another lender uses one of the credit scoring models mentioned above, those inquiries may be grouped together as one. And also note: Inquiries are only reported for two years and generally only affect your credit scores for one year. So over time, their impact should diminish.

More on Credit Reports & Credit Scores:

• What’s a Good Credit Score?
• What’s a Bad Credit Score?
• How Credit Impacts Your Day-to-Day Life

Image: Polka Dot