Can Renting a Car Affect Your Credit?

If you have a bad credit score, you will feel its effects in your everyday life. It will mean higher interest rates on your loans and credit cards, cutting your monthly budget. It might also mean paying more for utilities or at least needing to put down a deposit in order to secure them. It can even mean getting turned down for an apartment or a new job.

In short, having bad credit is tough. Luckily, there are things you can do to improve your score, like paying down your debts and making sure you pay your bills on time. Additionally, you should avoid any unnecessary credit checks, as they can negatively affect your score for up to two years.

Avoiding credit inquiries means not applying for loans or credit cards unless you need them, but it can also mean avoiding other things as well, or at least approaching them cautiously. One of those things is renting a car. Depending on your circumstances, renting a car might mean needing a credit check, which could lower your score.

However, here’s the good news: the damage to your score will be minimal. Only in rare circumstances would renting a car cause significant harm to your score (more on that later in this article).

Here’s more good news: Any effect on your score can be easily avoided using this one simple trick - use your credit card to rent the car instead of a debit card. However, remember that it is advisable to keep your credit utilization ratio no higher than 30%.

How do credit checks work?

When a business checks your credit, it’s because they want to see if you are a trustworthy borrower. While renting a car is different than taking out a loan or a credit card, the same basic rules apply. If you have a history of paying your bills and your rent on time, you are very likely to also pay for your rental car without any issues.

There are two types of credit checks that can be run: hard and soft credit checks. A hard credit check pulls a full copy of your credit report from one of the three major credit bureaus (TransUnion, Experian, and Equifax). Hard checks are also recorded on your report and will usually ding your score temporarily. For a hard check to be run, a company must have your express permission.

Soft credit checks, on the other hand, do not need your permission to be run. This is because soft checks return far less information than hard checks. And while soft checks can be recorded on your credit report, they do not affect your score. If you’ve ever received a “pre-approved” offer in the mail, that lender performed a soft check on your credit history. With car rentals, they will perform a hard check on your credit.

Here’s how credit scores work with debit cards.

When you rent a car with a debit card and the rental company runs a “hard check” on your credit, that check is recorded on your credit report and will be factored into your credit score.

Credit reports are documents compiled by the three major credit bureaus—Experian, TransUnion, and Equifax—that track your history as a credit user. Most information stays on your report for seven years, but some information may stay on your report for longer.

Your credit score is based on the information in those reports. Since information can vary between different credit reports, that means your credit score can vary depending on which report is used to calculate it.

The most common type of credit score is also the oldest: your FICO score. This is a three digit number ranging from 300 to 850. The higher your score the better, with 680 being the rough cut off for “good” credit.

There are other types of credit scores. The three credit bureaus, for instance, got together to create a score called VantageScore. Since this score is also based on the info contained in your credit reports, it won’t often vary widely from your FICO score.

Why you should rent cars with credit instead of debit.

Debit cards mean additional risk for car rental companies. Why do these companies insist on checking credit with a debit card? Well, most rental companies see debit cards as a red flag. With debit cards, they are much more likely to run into problems with insufficient funds to cover either the rental itself or additional costs that the renter might incur by damaging the car or forgetting to fill up the tank before they return it.

Yet, the debit card red flag isn’t big enough to stop car rental companies from renting to debit card users altogether. Instead, they simply run a credit check on the borrower before handing over the keys, in addition to other ways they try to disincentivize borrowers from using debit cards.

Beyond a credit check, renting a car with a debit card could require additional ID, providing proof of insurance, having certain car classes made unavailable to you, and even certain age restrictions. In short: renting a car with a debit card is a hassle. If you need to rent a car, it is advisable to use a credit card.

"Most rental car agencies want a credit card for the method of payment,” explained Todd Christensen, education manager for Money Fit by DRS, Inc. “It provides additional security in case of accidents or incidental damage to the vehicle.”

“They may think that because you aren’t using a credit card you may not even have one—perhaps because your credit is too low,” added Jake McKenzie, content manager at Auto Accessories Garage.

“This may cause the rental company to check your credit via what FICO calls a ‘hard inquiry.’ This inquiry can ding your credit by five points or more.”

If you have good credit, then a temporary “ding” of five points or so won’t be a cause for concern. Then again, folks with good credit probably have plenty of available credit on their credit cards to rent the car in the first place. They don't need to use a debit card!

For people with bad credit, things can get a bit challenging. Not only will they likely end up with a hard inquiry docking their already lousy score, but there’s the chance that their rental application could be denied—meaning they dinged their score for nothing!

If you have a credit card that is not maxed out and want to rent a car, it is advisable to use the credit card instead of using a debit card. It’s really that simple.

Except it's not always as simple. After all, people with bad credit are also less likely to have a credit card that they can use to rent a car, leaving them with little-to-no choice in the matter. Living with a bad credit score can be tough in any number of ways. So it’s not surprising that renting a car is one of them!

One way that renting a car could really hurt your score.

Recent credit inquiries are one of five major factors in how your credit score is calculated. However, it’s one of the least important factors, which is why renting a car with a debit card will only have a minor impact on your score.

The two most important factors are your payment history and your amounts owed. Your payment history makes up 35% of your total score and the amount you owe makes up an additional 30%. Together, they comprise a whopping 65% of your credit score.

Which brings us to the other way that renting a car could affect your credit.

“As with most accounts, if any fees or charges from the car rental agency are not paid, they may end up being sold to a collection agency, which would then show up on your credit report as a negative,” explained Christensen.

If you have a good credit score, then the odds are good that you don’t have any accounts that have been sent to collections. That’s because having a collection account added to your credit report can significantly hurt your score.

The reason that payment history is the number one factor in determining your score is that businesses prefer working with people who will pay their bills on time. So if you rent a car, it’s critically important that you pay all the related fees and expenses on time. Otherwise, your score could end up taking a major hit.

Author and Accredited Financial Counselor®, Todd R. Christensen, MIM, MA, is Education Manager at Money Fit by DRS, Inc. (@MoneyFitbyDRS), a nationwide nonprofit financial wellness and credit counseling agency. Todd develops educational programs and produces materials that teach personal financial skills and responsibilities to all ages. Having facilitated nearly two thousand workshops since 2004 on the fundamentals of effective money management, he based his first book, Everyday Money for Everyday People (2014), on the discussions, tips, stories, and ideas shared by tens of thousands of individuals and couples in attendance.

Jake McKenzie is the Content Manager at Auto Accessories Garage (@aagarage), a fast-growing, family-owned online retailer of automotive parts and accessories. He manages all written content for the website including research guides, product descriptions, and other informative articles. He also enjoys attending the annual SEMA Show, the premier automotive specialty products trade event held every November in Las Vegas. Jake often lends his opinions and expertise to a variety of online blogs, websites, and news sources.