Credit scores can be scary things. They can determine everything from whether or not you can get a loan or a credit card, to whether or not you are an appealing hire to an employer. They can impact your ability to get a cell phone or an apartment and they will greatly affect your ability to afford a new-to-you car. Because they are such a financial blunt-object, you should know how to protect your credit score while looking for the best deal on loans. Don’t worry, here at Instamotor, we have you covered.
First, get educated. When a bank runs your credit score to see if you are eligible for their product, they are running what is called a hard inquiry. Hard inquiries CAN negatively affect your credit score. These kinds of inquiries are usually done when a lender or financial institution checks your credit report to make a lending decision. They happen for things like mortgages, car loans and credit card applications. According to CreditKarma, hard inquiries can lower your score by a few points for as long as two years, but over time that impact will soften.
Hard credit inquiries generally only reduce a credit score by less than 5 points. According to Forbes though, that can have a big impact if you have a short credit history or if you’ve been applying for a lot of credit. Financial institutes see this as an indication that something is going financially awry in your life—and they tend to see you as an increased risk. The other thing to keep in mind is that if you are shopping for things like a mortgage or a better credit card at the same time, your credit is going to be hit pretty hard. Why? Because when all of those things come together at the same time, it looks like you are hunting for money and it can really hurt your score. If you’re only shopping for an auto loan and get multiple quotes and inquiries into your credit, they are often taken together and all of them only count as one inquiry, provided that you get them within a short period of time.
That brings us to the second thing to keep in mind: timing. Get all of the inquiries done at once. It sounds counterintuitive given what we just told you about the way that banks run your credit but…there is a loophole. It would be counterintuitive to have your credit affected negatively by shopping for rates, right? Banks know this, and know that they have to compete for your business. Thus if you get all of your inquiries done in a short period of time, your credit wont be affected as negatively.
The amount of time you have to shop, of course, varies from bureau to bureau. For example, according to Equifax, their rate-shopping window runs about 14 days. Any hard inquiries that are made on your credit during that 14-day window, have minimal negative affect on your credit or are taken as a single inquiry. The Consumer Financial Protection Bureau recommends that you get all of your shopping done within a 30-day window to minimize the impact that credit inquiries have on your credit. FICO, the Fair Isaac Corporation that calculates your credit score puts the shopping window at as long as 45-days. We say—the shorter the period the better your chances of avoiding a big credit hit.
Finally, know that you don’t have to have a hard credit inquiry to get an idea of what your rate might be. Banks can also do what’s called a soft credit inquiry—they essentially ask you a number of questions to see which offers might apply to you. These questions may include things like employment history and address. The banks then offer you loans based on your answers. This allows you to get an idea of what the interest rate might be or what you could qualify for, before you actually apply. Once you have a number of these in hand, and have chosen the right one for you, you can formally apply and the bank will then run a hard credit check.
If you want to check your own credit score before you go shopping (and we highly recommend that you do), you can use a service like Mint, Credit Karma, or if you want to check your credit once a year for free, head over to Annual Credit Report. To get your FICO score you’ll need to pay a small fee but it’s well worth knowing where you stand before you head off to the bank for a loan.
If you want help getting financing for your new-to-you car, check out Instamotor for great financing options, too and check back here frequently for all your used car need-to-knows.
Digital media content producer/consultant & former CNN senior producer, now running CN'TRL : Cars, Tech, Real Estate & Luxury.