Keeping your credit score as high as possible is an important part of your financial well-being. A high score ensures that you can access credit when you need it and receive the lowest interest rates. When you're shopping for a new car, understanding how your credit score is calculated, and how shopping for a car affects your score, can prevent unpleasant surprises and damage to your credit.
Score Factors
Your credit score is calculated using the information in your credit report. Each of five categories -- payment history, amount of available credit, length of your credit history, types of credit and the number of credit inquiries -- is weighted and given a score. Combined, these scores create your overall credit score. When a potential lender, such as a car dealership, reviews your credit report when you apply for credit, it's considered a hard inquiry. Hard inquiries do affect your credit score slightly, because they appear when you are actively seeking credit.
Affect on Credit Score
When you are shopping for a car and apply for financing, how much the credit inquiry affects your score depends on your overall credit history. Those with excellent credit scores -- generally anything over 750 -- most likely will not lose any points for the inquiry. Those in the mid-range of scores might only lose an additional five points. However, if you have a short credit history, or multiple inquiries into your credit, the credit inquiry can have a greater effect. According to Fair Isaac Corporation, people who have more than six hard inquiries into their credit are eight times more likely to declare bankruptcy. If you already have a low score and issues with your debt, seeking more credit raises red flags with the credit-reporting agency, and the additional inquiry can lower your score even more.
Rate Shopping
Because many people shop at multiple dealerships and generally seek the best rate for their car loans, multiple dealerships or lenders might make inquiries into your credit in a short period. FICO takes "rate shopping" into account when calculating your score. If you apply for loans from multiple dealerships within a two-week period, all of those inquiries are considered a single inquiry for the purposes of your credit score. This prevents you from losing multiple points, and in effect being penalized, for seeking the best terms for your loan.
Unauthorized Inquiries
The Fair Credit Reporting Act requires anyone who makes a hard inquiry into your credit to have your permission to do so. However, the law also allows anyone with a legitimate business reason to check your credit without your consent. Some car dealerships will run your credit using your driver's license number, which you have to provide when you take a vehicle for a test drive, arguing that you implied consent when you expressed interest in the vehicle. To avoid an inquiry appearing on your credit report before you are ready to purchase a vehicle, notify the dealer when you provide your license that you do not want him to run a credit check. Also, read any documents carefully to ensure that you are not consenting to a credit check, as some dealerships get consent using test drive paperwork or customer information forms.
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