Quick Facts About Dealership Credit Checks
- Never fill out a loan application at a dealership before you’ve picked a vehicle and are ready to buy.
- A dealership checking your credit score is a soft inquiry and won’t affect your credit.
- Any hard credit check triggered by a loan application will appear on your credit report, shaving points from your credit score.
We talk a lot about credit scores and their impact on securing a car loan. When applying for any type of financing, a higher credit score historically translates into quicker approval and a lower interest rate. Consequently, you want to maintain your credit score while car shopping and securing an auto loan. Shopping around for the ideal vehicle and the best financing may entail multiple dealerships and lenders looking into your finances. This situation begs the question: Does checking your credit at a car dealership impact your credit score?
You have reason to be worried. Why? Because wherever your credit score currently rests on the 300-to-850-point scale used by the primary credit-rating institutions, it’s as fragile as a robin’s egg. Constantly changing, it can go up or down several points from one month to the next for no obvious reason. The swings can be even greater if your credit has significant activity. For example, missing payments, paying off a loan, taking out a new loan, or any other actions can spur your credit score to soar or spiral downward.
As you read on, we will explain how dealer credit inquiries work, their potential impact on your credit score, and what you can do to keep that to a minimum.
- What Is a Credit Check?
- Soft vs. Hard Credit Check
- Pre-qualification vs. Pre-approval
- Minimizing the Impact of Dealership Credit Checks
What Is a Credit Check?
This may sound like a silly question because it seems self-explanatory; however, it is a bit more involved than it sounds. There are both soft credit checks and hard credit checks.
Soft vs. Hard Credit Check
Like soft-serve ice cream and traditional ice cream are both ice cream, soft and hard are both credit checks; however, they satisfy in different ways.
TIP: You will sometimes hear a soft check referred to as a “soft pull” or a “soft inquiry” and a hard check as a “hard pull” or a “hard inquiry.”
What Is a Soft Credit Check?
A soft credit check is like being engaged to be engaged. That is, a lender has some interest in your credit health but isn’t signaling any degree of commitment. It’s a creditor glancing at your credit score and perhaps even your credit report. Still, it doesn’t do a deep dive into your credit history. Therefore, a soft credit check doesn’t impact your credit score. In other words, the credit check doesn’t signal impending additional debt because you didn’t complete and sign a new credit application. Lenders and credit bureaus, such as Experian, view new debt as an additional risk.
According to the credit experts at Experian, here are some examples of a soft inquiry:
- Checking your own credit
- One of your current creditors checking your credit
- A potential creditor you’ve authorized for a soft inquiry checks your credit
- A creditor checks your credit to determine if you may qualify for a pre-approved offer
What Is a Hard Credit Check?
A hard credit check, hard inquiry, or hard pull is triggered when you apply for a new car loan, just like a mortgage, apartment lease, or other line of credit. In other words, if approved, you will add to your debt and increase the risk you pose to current and future creditors. Lenders judge many hard inquiries as indications that you are attempting to increase your indebtedness and risk. Therefore, hard inquiries appear on your credit report and drag down your credit score by a few points.
Experian and other credit bureaus recognize a car shopper may submit loan applications to several dealers. As a result, they treat multiple hard inquiries of the same loan type as a single inquiry when they occur within a 14- to 45-day period (It can vary). On the other hand, when applying for different types of credit, for example, a car loan and a credit card or some other unrelated line of credit, each is treated as a separate hard inquiry. Consequently, your credit score will drop by a few points for each hard inquiry.
According to Experian, hard inquiries will remain on your credit report for up to two years, but their impact on your credit score should diminish to zero within the first 12 months.
PRO TIP: Only apply for one type of credit at a time. In other words, when trying to finance a car, don’t apply for a credit card, mortgage, or installment loan while you are attempting to secure a car loan. Nothing sets off alarm bells at the credit bureaus and among lenders like a borrower trying to secure multiple types of credit at once.
Do Car Dealerships Run a Hard or Soft Credit Check?
Car dealerships run hard and soft credit checks. Often, car dealers want to size up the borrowing capability (credit risk) of a shopper before investing the time and trouble involved in test-driving different models. Moreover, a better understanding of a shopper’s creditworthiness can help the car dealer direct their efforts to models better suited to your budget. This can be done with a minimum amount of information, such as your income, time on the job, your credit score, home ownership, and so forth. Verification of that information is a soft credit check. Therefore, it won’t attract the attention of a credit bureau. Filling out and signing a loan application, which will include some of that same information, will trigger an in-depth credit check by the potential lender. This signals to credit bureaus that you are attempting to assume more indebtedness. You will now be on the credit bureaus’ radar. More than likely, this will negatively impact your credit score.
Can a Car Dealership Run Your Credit Without Your Permission?
Car dealers may perform a soft inquiry without a shopper’s permission or, in some instances, knowledge because they don’t affect your credit score. However, a car dealer can’t perform a hard inquiry without your written consent because a hard pull will diminish your credit score. The moral of the story is don’t sign a loan application at a dealership until you have picked out a car and are ready to buy.
What Is Shotgunning a Loan Application?
If you fill out and sign a car loan application at a dealership, the dealer may submit the financing request to several lenders. This is called shotgunning. Each lender may then investigate with a hard credit pull and verify the information. Because these multiple hard inquiries usually happen within the short span of a day or two, the credit bureaus will view them as a single inquiry.
Pre-Qualification vs. Pre-Approval
We recommend you shop for a car loan and financing before setting foot on the dealer’s lot. This is true even if you plan to accept a financing deal from a manufacturer-supported lender (captive finance company) like Ford Motor Credit or Toyota Financial Services. Why? Because you never know what will happen once you enter the dealership’s business office. In other words, if you don’t qualify for that deal or maybe the offer has expired, you will need alternative financing. This is a journey best begun before you walk into the dealer’s business office.
We suggest checking with financial institutions you already do business with, like your bank or credit union, and then moving to competing lenders. To pick the best car financing deal, you need to know how much you can borrow and the interest rate you qualify for. Both may vary from lender to lender, allowing you to choose the best deal.
Such encounters with a lender can lead to either loan pre-qualification or pre-approval. According to Experian, it depends on the lender and the type of loan. Until you are ready to apply for a loan, you want those fact-finding lender inquiries to be of the pre-qualification kind.
What Is a Pre-Qualification for a Car Loan?
A loan pre-qualification is the product of a soft inquiry, which means you may have to supply the lender with a few bits of your financial information, such as your annual income and major financial obligations. However, you don’t fill out and sign a loan application. Based on your information, the lender provides an estimate of the amount you are qualified to borrow and the likely interest rate for a loan. It is not a commitment from the lender; a pre-qualification simply provides you with a ballpark idea of the amount and cost of a loan based on whatever information you provide.
If you request, the lender will probably issue a printed copy of the pre-qualification.
What Is a Pre-Approval for a Car Loan?
A loan pre-approval is where things begin getting real. A signed loan application triggers the pre-approval process. The lender will also require some detailed financial information, such as W-2s, pay stubs, and bank statements. It prompts a hard inquiry that will land on your credit report. If a soft inquiry is being engaged to be engaged, a hard inquiry is being engaged. A pre-approval signals a degree of commitment. The lender will issue you a letter stating the pre-approved loan amount, terms, and interest rate, which you can take to the dealership. As an engagement does not guarantee the marriage, pre-approval doesn’t always guarantee a loan.
For example, any significant change in your financial status between the pre-approval and the vehicle purchase could jeopardize the loan. These significant changes can include job loss or the death of one of the loan applicants if the pre-approval was based on two incomes.
By the same token, the borrower isn’t locked in either. If you change your mind for any reason, pre-approval isn’t a loan or even a contract. You can walk away before finalizing the loan.
How to Minimize the Credit Score Impact of Dealership Credit Checks
Whether it’s inquiries by dealerships or lenders, the key to reducing the impact of credit checks on your credit score is to submit only soft credit checks in the loan research phase. Pre-qualifications and soft credit inquiries can occur over weeks or months without affecting your credit score.
When you are ready to buy a vehicle or become serious about acquiring a car loan, group the hard inquiries and pre-approval attempts within two or three weeks. They will appear on your credit report but will be treated as a single hard pull. Therefore, they will only have a minor impact on your credit score.
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