When shopping for cars, consumers typically fill out a credit application at the dealership. The dealership may then submit the application to multiple banks and finance companies. This is known as “shotgunning”.
When a prospective creditor pulls your credit report, that has an impact on your credit score. The rationale for this is that, because you have applied for new credit, you may soon have financial commitments that are not currently showing up on the report, and those commitments may impact your ability to make payments on other accounts.
The credit reporting agencies say that, when a car dealership “shotguns” the credit application, they treat this as a single credit pull so long as the inquiries are made withing a couple weeks of each other. But, if a consumer shopping for cars goes to multiple dealerships applying for credit, and if they shop around for more than a few weeks, the consumer’s credit store might plunge. According to one news report, one consumer saw her score drop about 20 points after she went to four dealerships, who submitted her application to 27 different creditors.
How to Protect Yourself: We recommend that consumers apply for credit BEFORE they go to a dealership. Once you are preapproved at your own bank or credit union, you can shop at the dealership as a cash buyer. Since car dealers usually “mark up” the interest rate given to them by banks and finance companies, you can save on interest by gettng preapproved.
For more tips on things to do before visiting a dealership, check out our article here.