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.

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 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. 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.

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.
• 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.
• 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.

How long enquiries stay on file

In New Zealand, hard enquiries generally sit on your credit file for several years. The reassuring part is that their pull on your score fades long before they drop off, and a single, sensible enquiry carries very little weight after a few months. So one application today isn't something that haunts you. It's the fresh clusters that matter most to a lender. You can request your own credit file for free from the credit reporting agencies to see exactly what's recorded, which consumerprotection.govt.nz explains how to do.

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 compare 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, the same logic applies to refinancing your car loan: check once, softly, before you commit.

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.