How Car Shopping Can Lower Your Credit Score
Congratulations! Your shopping has paid off and you've finally found an excellent car at a reasonable price. Now, how do you plan to pay for it?
Dealers will be happy to arrange financing for you. Simply fill out and sign a loan application, and the Finance and Insurance (F&I) manager will immediately begin searching their lender network to find the best deal for you.
Unfortunately, dealers may submit your information to several lenders to acquire that deal – a method known as "shotgunning" – and that has the potential to lower your credit score.
Each lender will run a credit check to see if you qualify for the loan. These checks are more extensive "hard pulls" that slightly drop your credit score – typically less than five points unless you have other risk factors. A high number of hard pulls can give lenders the impression that you're rapidly expanding your credit, making you a risk in their eyes.
Most scoring systems allow for shotgunning for auto and home loans, rightly assuming that the multiple inquiries are directed toward a single purchase. You aren't likely to be shopping for multiple homes or cars at the same time. However, the multiple inquiries must take place within a short period of time – varying by scoring system, but typically around two weeks.
There's also no guarantee that a future lender will use a scoring system that takes shotgunning into account. All the inquiries are still registered on your credit report, and a scoring system can choose to treat them as individual pulls.
Be careful when shopping at multiple dealerships. Shotgunning at an individual dealership is almost instantaneous, making it likely that the credit pulls will be considered as a single inquiry. However, if you drag out the car shopping process for multiple weeks or months, the shotgunning efforts at different dealerships may be viewed as separate inquiries.
The easiest way to prevent excessive credit pulls is to secure your own financing before going to the dealership – assuming you already have a good relationship with a lender or you can limit your search to a few select lenders.
"It's smart to secure your financing in advance before visiting a dealership," said Todd Nelson, Senior Vice President at LightStream. "It takes just minutes to apply for a low, fixed-rate auto loan online, and you can have funds deposited directly into your bank account as soon as the same day. With funds already in hand, you can negotiate as a cash buyer to purchase the car you want, from any dealer – skipping the financing office altogether."
Dealers have great incentive to steer you toward their own financing operations. They may ask you to fill out a credit application anyway, or insist that it's necessary for security reasons. Don't authorize a credit check unless you really do want to take advantage of dealer financing. A string of hard pulls without a corresponding auto loan can leave the impression with future lenders that you were turned down for the loan – even if you purchased the car with hard cash.
In any case, it's wise to check your credit report regularly to screen for any unauthorized credit pulls. These credit checks could be a sign of potential fraud or identity theft. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
If you find that a dealership has run credit checks without your authorization, you have the right to ask them to rescind those hard pulls – although you'll have to expend some energy to do so. Be sure that you didn't unwittingly authorize the pulls or sign a loan application – in that case, the hard pulls were legitimate, and you have little recourse.
Shotgunning may not harm your credit score if it's done correctly – but by authorizing an auto dealer to do the shotgunning for you, you've ceded control to another party. Check with the Better Business Bureau and use online reviews to make sure any dealer you choose is worthy of that trust – or secure your own financing and keep everything in your hands.
If you are looking to finance your dream car, visit Lightstream.
Photo ©iStockphoto.com/SeventyFour