Shopping around for auto financing can be just as important as shopping around for a good deal on the vehicle itself. Although several factors play into the auto loan rates available to you, your credit score is a large piece of the puzzle. We encourage all car shoppers to get pre-approved for an auto loan from multiple lenders, but it's especially important for those who don't have good credit. Unless you're paying for a car in cash, you'll have your credit pulled by lenders when you're ready to finance a vehicle. We'll take the mystery out of what differentiates a soft credit pull from a hard pull so you can go into the car buying process with confidence.
Soft Credit Inquiry
A soft credit inquiry is when a lender pulls your credit for auto loan pre-approval or when you pull your own credit score. It can include credit inquiries by potential employers, credit card companies, or insurance companies for pre-approval offers. According to Experian, a soft credit pull will not affect your credit score and won't show up on your credit report. The soft credit pull is only visible to you with the exception of insurance companies who may be able to see other insurance company inquiries, and inquiries by debt settlement companies to access your report may be shared with your current creditors.
Because soft credit pulls will not negatively impact your credit, getting pre-approved for a car loan lets you compare multiple loan offers and select the best interest rate. You should also regularly keep an eye on your credit by getting a copy of your credit report. You're eligible for one free copy of your credit report per year and you can pull it more often with no impact on your score, but that may come with a fee.
Hard Credit Inquiry
A hard inquiry is when a credit inquiry is directly tied to a loan application. This can include applications for credit cards, student loans, mortgages or car loans. Unlike the harmless soft credit pull, a hard inquiry will impact your credit score and too many hard inquiries on your report can be viewed as a red flag to lenders. You will be required to give your consent for each hard inquiry to your credit report so there should be no surprises. It's important to look over your own credit report regularly and check for any hard pulls that were made in error or suspicious inquiries that can signal identity theft.
According to NerdWallet, each hard inquiry can knock your FICO credit score down by 5 points and your VantageScore by 10 to 20 points. Hard inquires can stay on your credit report for up to two years, but over time their impact on your score will decrease. Credit report items like payment history and debt-to-income ratio are more heavily weighted than hard inquiries but if you're on the border of credit ranges, they can knock you down. Luckily, there is some leeway for hard credit pulls when you're car shopping. For example, multiple credit inquiries for auto loans within a 45-day period will be counted as one on your FICO score.
Know Your Credit Rights
In 1970, the Fair Credit Reporting Act was passed to make sure individuals have control over their credit. This means having the freedom to keep an eye on your credit score and to report any mistakes you find. The FCRA also gives you more transparency by requiring lenders and employers to disclose if your credit was the reason for denying a loan or job opportunity.
All three credit bureaus are required to provide you with a free copy of your credit report at least once per year. If you find any inaccurate information or if there are old items dragging down your score that need to be removed, you have the right to dispute the errors. Use these rights to your advantage before buying a vehicle to make sure your credit score is as high as possible so you have the best chance at a good car loan offer.