Does Getting Denied for Auto Financing Affect Your Credit?

Having your application for credit denied, whether its for a new credit card or for a large purchase such as a car or home, is frustrating and disheartening. While not having the funds you need can be a challenge, you may also worry about the denials effect on your overall credit. Fortunately, if your auto loan application is denied, it has a limited impact on your credit report and score.

Credit Inquiries

When you apply any type of new credit, including auto financing, and the lender declines to extend financing, only the fact that you applied for the credit appears on your report, not the outcome of the request. Credit reports only contain information about inquiries into your history and accounts that you actually open. Thus, if you apply for a car loan and the application is declined, the report will only show that the bank or dealership looked at your credit, also known as a hard inquiry. The fact that you did not receive auto financing will not affect your other accounts.

Credit Score

Applying for auto financing, whether you receive the credit or not, can influence your credit score. Several factors, including your payment history, amount of available credit, the length of your credit history and the number of inquiries into your report influence your credit, or FICO, score. Seeking new credit, particularly if you already have a low score, can drop your overall score by as much as five points, because according to the credit bureau Experian, those who have multiple inquiries into their credit over a short period are more likely to have trouble managing their finances and meeting their obligations.

Rate Shopping

If your application for auto financing is denied by one source, you may seek credit from someone else. The good news is that if you apply with multiple dealerships within a few weeks, the multiple inquiries will only count as one hard inquiry into your credit, and you only lose a few points overall, rather than several points for each inquiry. Credit reporting agencies realize that consumers often rate shop to find the best terms for their auto financing, and as a result, will have their credit report viewed by multiple sources. The bad news is that if youre denied credit from one dealership, theres an increased chance that youll be denied by other dealerships as well, since its the negative information in your credit report that caused your application to be declined.

Review Your Report

When youre denied for any type of credit, the lender is required by law to provide you with information about where they acquired your credit report and the reasons that they refused credit. You are entitled to a free copy of the credit report they used, and you should take advantage of that offer to confirm that there arent errors in your report that are harming your credit. If you discover errors in the report, you can dispute them and try to improve your overall score. If the report is accurate, the denial letter you receive will give you an idea of the areas you need to work on to improve your credit and chances of getting financing in the future.