After a potential lender pulls your credit report to check your score, the lending company shows up on your report as an inquiry. Inquiries generated in response to your application for credit do hurt your credit score after a short waiting period, but in most cases, the impact is minimal.
Credit Score Impact
A car loan inquiry will reduce most people's credit scores by five points or less, according to FICO, the company that developed the most commonly used credit scoring model. The exception is someone who has a short credit history or just a few credit accounts. In this case, the impact might be more than five points because the credit report has less positive information to offset the inquiry.
Time Frame
Although inquiries show up on your credit report immediately, they will not begin to affect your FICO credit score until 30 days later. This is important because it allows you to compare interest rates between lenders when you are shopping for a car loan. Even though the first lender makes an inquiry, this inquiry will not affect your credit score that the other lenders see when they pull your credit report during the following month. This allows you to compare loans and interest rate quotes based on the same credit score.
Multiple Inquiries
The FICO credit scoring formula treats multiple inquiries for the same type of loan during a short time period as just one inquiry. This means that whether you have an inquiry from one car loan issuer or five on your report, your credit score will only decrease for the first inquiry. The time period for multiple inquiries depends on what FICO scoring model the lender uses. With the older scoring model, inquiries within a 14-day span are counted as just one inquiry. The newer scoring model lengthens the time period to 45 days to allow more time for rate shopping.
Considerations
Having one inquiry on your credit report does not have a very significant impact on your credit score, compared to other negative information on your report. Late payments and credit cards with balances close to their limits hurt your score more than a car loan inquiry. However, having many separate inquiries that do not fall within the multiple inquiry category above can hurt your score. This is because FICO statistics show that someone with six or more inquiries on his credit report is eight times more likely to go bankrupt than someone with no inquiries.
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