Credit scores can be scary things. 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 so important, you should know how to protect your credit score while looking for the best deal on loans.
First things first, there are two types of credit inquiries: soft checks and hard checks. Soft inquiries—or "soft pulls"—occur when your credit is checked as part of a background check. Hard inquiries—or "hard pulls"—typically occur when a financial institution such as a lender or credit card issuer checks your credit when making a lending decision. These generally need to be authorized.
Here at instamotor, we start with a soft pull for your pre-qualification. With a pre-qualification, we can give you the loan amount you will likely be approved for, without impacting your credit score. If all the information you provide on your pre-qualification is current, your final approval terms will be very close to your pre-qualification terms. This way you can car shop with a real budget and get your actual monthly payments and interest rates. No need to be kept in the dark about payments, or get your heart on set on a car out of your range.
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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 hard 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. If you get all of your inquiries done in a short period of time, your credit won't be affected as negatively.
The amount of time you have to shop 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 effect 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 ther 14-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.
Know that you don’t have to have a hard credit inquiry to get an idea of what your rate might be.
For a soft inquiry, lenders will ask you questions about your income, employment, and address. This allows you to get an idea of what your loan amount and interest rates will look like, without the impact of a hard credit inquiry.
Unlike many of our competitors, here at instamotor, we start with a soft pull with a social security number, so we can give you the most accurate pre-qualification possible. This helps us get the most accurate terms possible, without performing a hard inquiry that impacts your credit. We protect your credit while providing the answers you need to make an informed car-buying decision.
In case you're not quite ready to hand over your personal information, we built a system where you can receive estimated monthly payments and interest rates, by selecting your own credit rating. Check it out here.
We value transparency, and we know it doesn't benefit our customers to keep be in the dark about monthly payments, interest rates, or any other part of the car buying process.
If you want to check your own credit score before you go shopping (and we highly recommend that you do), you can start with a pre-approval at instamotor, use a service like Mint or Credit Karma, or check your credit once a year for free, at Annual Credit Report.
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.
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