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Topics addressed on March 18, 2009:
Impact on credit scores of inquiries for an auto loan
I run an auto dealership that sells luxury automobiles. I understand that multiple inquiries within a "shopping" timeframe do not hurt an individual's credit score. Can you explain what the time frame is and any other tips we can pass along to our customers?
You are correct that credit scoring systems allow people to shop for the best rates on car loans without having a negative impact on their credit scores. They do so by counting all inquiries for auto loans within a given period of time as a single inquiry.
That time period may vary slightly from one credit scoring system to another but typically is 14-days.
That allows plenty of time for a person to be preapproved by their own lender, or for a car dealership to shop their loan application with multiple lenders in a practice commonly referred to as “shotgunning.”
When a car dealership shotguns a loan application, they send it to many different lenders with which the dealership has relationships. The process usually only takes a few minutes and enables lenders to compete for the loan and for the car dealership to help their customer find the best loan terms.
Often, the customer can pick the car they want, apply for credit, get approved and drive off the lot within a matter of hours, all without leaving the dealership.
Because credit scoring systems count multiple auto loan inquiries as a single inquiry, shotgunning does not affect a person’s ability to qualify for credit.
When considering a large purchase, such as a new car, consumers should get a copy of their credit report well in advance to make sure that everything in it is accurate. Doing so will also give an idea of areas that might need work to improve the credit standing before applying for the car loan.
I also encourage everyone to consider purchasing a credit score at least once when they request their personal credit report. The credit score will come with a description of what from their personal credit report most affected the score, both positively and negatively. Those factors are specific to the individual’s personal credit report and will enable them to identify the specific steps they need to take to become more creditworthy.
Because credit scores are unique to each individual’s credit history, it is unwise to give off-the-cuff advice. While it might be good advice for one person, it could be damaging for another.
Consider allowing your finance manager to share the credit score risk factor statements with your customers. Your customers can use those statements to help them take steps to improve their creditworthiness.
My final suggestion is to make sure your customers have reasonable expectations based on their overall financial situation. Getting prequalified with a lender can help consumers get a better idea of how much car they can truly afford. The best way to avoid disappointment is to not get their heart set on a luxury vehicle only to discover they can only qualify for a commuter car.
Thanks for asking.
- The "Ask Experian" team