Is a Credit Score Affected by Car Dealer Searches?

When you apply for an auto loan – or when a dealer does on your behalf – there’s a slight dip in your credit score. It indicates you’re planning a major purchase that you need to borrow money for, and that indication that you’re about to take on debt makes you a slightly larger credit risk. However, because of how the score is calculated, your score is unlikely to suffer a major drop after your trip to the dealership.

Inquiries account for 10 percent of your credit score. A “hard” inquiry, such as one conducted by a car dealer, indicates you’re applying for additional credit. Too many hard inquiries may indicate you’re poised to overspend or are desperate for additional funds, neither of which makes you a good credit risk. Fortunately, the formula that determines your credit score takes into account that shopping for car loans from 10 lenders doesn’t mean you’re likely to buy 10 cars.

If every inquiry regarding an auto loan dropped your credit score, you’d have a disincentive to shop around for financing and might have to accept an unfavorable deal rather than risk lowering your score further. Because the credit bureaus recognize that many customers seek second, third and even 10th opinions before picking a loan, it treats a group of auto loan inquiries for a specified time period as one single query. Therefore, once the first dealer, bank or credit union has pulled your credit history, there’s no risk in allowing more potential lenders to do the same.

When you apply for financing at a dealership, it often submits your application to many lenders at once. This practice, commonly known as “shotgunning,” gets lenders to compete for your business – and for the dealership’s. The latter is an important point to remember when deciding on financing. Your dealer doesn’t have to present you with the loan that’s best for you – he can go with the financial institution that offers him the highest markup instead. If you don’t like your financing offer, let the dealer know it’s a deal-breaker and that you plan to seek a loan elsewhere. You might be surprised at how quickly a better package arrives.

Some dealers may want to run your credit when you ask to test-drive a car, as another bit of information to help them sell you the car. But if you’re not financing the vehicle, the dealership shouldn’t run your credit if you object. Tell the dealer explicitly that you don’t authorize him to run your credit – you’re just there to test-drive the car, not to buy one.