If you have been searching for a new car, you may be considering financing as an option. Financing a car is a great way to build your credit score and to be able to afford the car of your dreams.
However, if you are aware of how credit reports and scores work, you might be concerned about how searching for an auto loan can affect your credit.
Many consumers are confused or unaware of the main differences between a hard inquiry and a soft inquiry. A soft inquiry occurs when you check your own credit score. Soft inquiries have no direct impact on your credit score. However, soft inquiries can be logged into your credit report, even though they may have no effect.
A hard inquiry, however, is much different. A hard inquiry happens when a lender, creditor, or landlord pulls your credit report to see if you are qualified for a line of credit. Anytime you are looking for a line of credit, a hard inquiry will be performed. This includes new credit cards, loans, mortgages, etc.
Hard inquiries do in fact affect your credit score, but only slightly. Out of the 5 major categories that make up your credit score, a hard inquiry only affects one: new credit. New credit accounts for 10% of your total credit score calculation.
It is normal for value-oriented consumers to search and apply for multiple auto loans while they shop for a new vehicle. The credit bureaus recognize this and refer to it as “loan shopping”. If you search and apply for multiple auto loans in a period of 2 weeks or less, these multiple hard inquiries will only count as 1 hard inquiry.
This allows consumers to freely shop for a competitive auto loan rate in their area. This same idea applies to mortgages as well, but not to credit cards.
If you are looking to buy a new car but are in need of financing, CrediReady can help. Our nationwide network of trusted dealers and verified lenders work with buyers in all credit situations. Take a moment to fill out our free no-obligation loan inquiry form and start shopping for your dream car today!