Credit check by car rental firm won’t hurt score for long

Dear Credit Score Report,
I have a question about how credit links to car rental companies. While I do know they make a hard inquiry into your credit (which is reasonable, considering half of them loan you new cars), what I don’t know is how much of a dip your credit score takes because of this. Also why does a rental inquiry remain for two years, assuming one returns the car in a few days? — Srivatsan

 

Hey Srivatsan,
Although you may have heard otherwise, it’s not standard procedure for car rental agencies to check the credit histories of prospective drivers. But there are exceptions, such as when you rent with a debit card. In that case, some agencies may perform a credit check that — like any hard inquiry — will remain on your credit report for two years, although any impact to your credit score will be limited and diminish over time.

Car rental agencies want to loan their vehicles to responsible drivers who are unlikely to get in an accident, and if they do, will be able to pay for any repairs. Unlike credit cards, which draw funds from a bank, debit card payments are limited by the amount of money in the cardholder’s checking account. That means debit card holders may not be able to pay for repairs if the vehicle gets damaged. To protect against that risk, and to verify address and employment, the rental agency may require an upfront credit check. (For more on this topic, see our story “Most rental car companies accept debit cards, survey finds.”) “This is a typical procedure in our industry, in order to minimize the potential for loss associated with this form of payment,” says Alice Pereira, a spokeswoman for rental car giant Avis. “For example, if a renter damages a vehicle or keeps a vehicle beyond their reservation dates, in either case, the amount of money in the debit card account could easily be exceeded, leaving us unable to collect.”

That’s why it makes sense for the rental agency to see if you’re a responsible borrower before lending you a vehicle. By reviewing your credit report, the rental agency can feel more confident about allowing you to rent with a debit card. “By checking a customer’s credit, we are better able to determine if there is an unacceptable risk in accepting a debit card for payment,” Pereira says.

You’re correct that such a credit check can affect your credit score. Hard inquiries made by any company can impact your credit score — but usually not by much. As explained on FICO’s website, your FICO score will probably decline by less than five points following an individual credit inquiry. As with all hard inquires, a car rental agency’s credit check will remain on your credit report for two years, although its impact will lessen over time as you exhibit other responsible borrowing behavior. After one year, it will no longer affect your FICO score. “FICO only pays attention to hard inquiries up to 12 months old,” says company spokesman Craig Watts.

In other words, credit checks typically do less damage to a borrower’s credit score than the damage an irresponsible driver could do to a rental agency’s vehicle.

Good luck!

— Jeremy

See related:Most rental car companies accept debit cards, survey finds, Don’t fear credit score drop when applying for new card, ‘Hard’ inquiries have limited credit score impact