When you want to buy a new set of wheels, you often spend as much time shopping for low interest rates as you spend test driving cars. Rate shopping can hurt your credit score but only if the lender actually pulls your credit report. Even then, you may notice very little difference in your score unless you allow your search for a new car to drag on for weeks or months.
Some lenders offer flat interest rates for car loans, and you either qualify for the loan or you do not. Other lenders have tiered interest rates and the higher your credit score the lower your rate. However, the first step in shopping for rates normally involves pre-qualification. During this phase, you supply the lender with basic information about your income and existing debts. The lender calculates whether you can afford a payment for the car in question and provides you with various rate quotes without actually checking your credit score. Pre-qualification has no impact on your credit score, but these rate quotes are really meaningless in isolation because your credit score ultimately makes or breaks the deal.
If you like the deal on the table, you can ask your lender to submit a formal application, in which case the lender does check your credit report. When you apply for a car loan through a dealership, the dealer normally submits several simultaneous loan applications with multiple lenders, each of which checks your credit report. Your credit score drops any time you apply for new credit because credit bureaus view applications for new loans as a sign that you are running short of cash.
While credit applications unnerve the credit bureaus, these organizations are smart enough to realize that savvy folks shop around for the best deal. If you apply for the same type of credit product from several lenders within a short space of time, the credit bureaus record this as one single inquiry. Time frames vary, but typically you can get away with submitting several applications within a two-week period without the bureaus adding more than one credit hit to your report. If you cannot make your mind up and spend months submitting new applications, then you will see several inquiries on your report and your score may suffer.
New credit applications account for just 10 percent of your overall score, so as long as you pay your existing bills on time your score should not plummet. Normally, each inquiry causes your score to drop by just a few points. If you have an 800-plus credit score, then a few points make very little difference. If you have a credit score of 650 or less, then a few points could kill the deal, because many lenders are loathe to lend money to people with scores in the lower 600 region and below. Several inquiries over the course of a few months could push your 600 plus score down into the 500 range. You can avoid this problem by finding out your score when you submit your first application and then providing your score to other lenders and asking to get pre-qualified rather than pre-approved.