Does applying for car finance hurt your credit?

The short answer

Applying for car finance can touch your credit, but for most people it's minor and short-lived. One application, checked properly, is nothing to be scared of. The problem starts when you apply again and again at different lenders in a matter of days or weeks, thinking you're just comparing. Each of those can record a hard check, and a pile of them close together is what pulls your score down and makes the next lender nervous. So the goal isn't to avoid applying. It's to avoid applying badly.

How a credit enquiry gets recorded in New Zealand

Three credit reporting companies hold consumer files in New Zealand: Centrix, Equifax and Experian (formerly illion). When you apply for credit, the lender asks one or more of them about your history, with your consent. Consumer Protection describes each credit check as a lender or organisation asking about your credit history, and says it usually needs your consent first.

That request is recorded on your file as an enquiry. Lenders who later look at your file can see that you applied for credit, and when. Under the Credit Reporting Privacy Code, the Privacy Commissioner says a credit report is generally seen only by credit providers considering your application, plus a short list of limited cases such as a landlord who has offered you a tenancy or an employer for a role with significant financial risk, generally with your consent.

Not everything is an enquiry. Checking your own file isn't an application for credit. A soft check, the kind we run, is a look at your file that doesn't leave a visible enquiry for other lenders.

Soft checks vs hard checks

The whole thing makes more sense once you know there are two kinds of credit check, and only one of them affects your score.

• A soft check is a look at your credit that doesn't affect your score and isn't visible to other lenders. Checking your own file is a soft check. So is checking your options with a service that uses one. You can do these as much as you like with no downside.
• A hard check is a full enquiry that gets recorded on your file when you formally apply for credit. One or two won't hurt much. It's the stacking of several in a short window that does the damage.

For a fuller definition, see credit check explained, hard credit checks and what a credit score is.

Why lots of applications in a short time hurt

To a lender looking at your file, a run of hard checks in a few weeks doesn't look like careful shopping. It looks like someone applying everywhere because they're being turned down, or taking on a lot of credit at once. Both read as risk. Consumer Protection says the same thing from the other direction: applying for several sources of credit in a short period can lower your score, and many credit checks suggest you may be seeking more credit than you can afford. Its example is four credit cards in three months.

So even if every application was sensible, the pattern can count against you and lower your score at the exact moment you want it looking its best. That's the trap people fall into when they apply directly at three or four lenders to compare rates.

Worked example

Illustrative only. Real scores and lender reactions vary. Two people want a $10,000 car loan and have similar incomes and credit files.

• Person A applies directly at four lenders in the same fortnight to compare rates. Their file now shows four new enquiries from the past two weeks. The next lender sees a cluster and may ask why, or weigh it as a risk signal.
• Person B checks their own file for free, uses a single soft check to see which lenders suit them, then lodges one full application with the lender they've chosen. Their file shows one new enquiry.

Both compared options. Only one left a trail that looks like financial stress. Even then, a lender weighs your income, costs and deposit as well as your enquiries, so no pattern settles the outcome on its own.

How to shop around without the damage

You can absolutely compare deals. Just do it in a way that keeps the hard checks down to one:

• Start with a soft check or pre-approval. Many options let you see your likely position without a hard enquiry. That's your comparison done, damage-free. Check your options with one soft credit check, and read our guide to car finance pre-approval.
• Use one broker who shops it for you. Instead of you applying at several lenders, a broker takes your details once and compares lenders on your behalf, typically off a single check. One footprint, not five. Our dealer vs broker vs bank guide compares the routes.
• Only lodge a full application once you've chosen. Do your comparing first with soft checks, then make the one hard application that counts.
• Check your own file first. Knowing what's on there, for free, means you apply to the right lender the first time instead of guessing.
• Space out anything else. New credit cards, buy-now-pay-later accounts or store credit just before a car application add enquiries and debts at the worst moment.

For how a soft check fits into the rest of our process, see soft credit check for car finance and, for benefit applicants, credit checks explained for WINZ applicants.

How long enquiries stay on file

In New Zealand, hard enquiries generally sit on your credit file for several years. Equifax says previous enquiry information remains on its file for four years. The Privacy Commissioner says that for most credit information, credit reporters can generally disclose it for four to five years and keep it on an internal record for one more year. Defaults are different: Consumer Protection says payment defaults can stay for five years, even after you pay them in full.

The reassuring part is that an enquiry's pull on your score fades before it drops off, and a single sensible enquiry carries very little weight once it is no longer recent. So one application today isn't something that haunts you. It's the fresh clusters that matter most to a lender. For the full run of retention periods, see how long defaults stay on your credit file.

How to get your free credit report

Your credit file is yours to see. Consumer Protection says you can request your report from Centrix, Equifax or Experian, that each should respond within 20 days (and tell you why if it takes longer), and that you may be offered a paid option for faster delivery. You'll usually get a credit record, not necessarily a score.

1. Ask all three. An error on one report may appear on the others, and each company can hold slightly different information.
2. Read the enquiries section. Count how many you made in the last few months, and check you recognise each one.
3. Dispute anything wrong. Contact the organisation that supplied it, or tell the credit reporter directly. They must check with the source and flag the item as disputed.
4. Escalate if needed. If a correction is refused and you believe it's justified, you can complain to the Privacy Commissioner.

Our step-by-step page on getting a free credit report has the detail, and removing or correcting a default covers disputes.

How Fair Finance helps

This is the whole reason a service like ours exists. We're not a lender. What we do is take your details once, run a single soft credit check that doesn't touch your score, and look across our lender panel to find the one most likely to give you a fair go. That means you get the comparison without applying at several lenders yourself and collecting a hard check at each. If you're weighing a switch to a better rate on a loan you already have, the same logic applies: check once, softly, before you commit. Nobody can promise approval, and lenders decide case by case. When you're ready, check your options here.

Sources

• Consumer Protection: Credit checks, scores and history
• Privacy Commissioner: Who can see my credit report, and how long credit issues remain
• Equifax: How long information is held on your credit file

General information only, not financial advice. You're entitled to a free copy of your own credit file. For how to request it and your rights, see consumerprotection.govt.nz.