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Loan Shopping? Here’s How Multiple Inquiries Impact Your Credit Score
Shopping around to make sure you find the best deal on a loan is financially smart. Getting the best interest rate and terms possible, especially on a mortgage, could save you thousands or even tens of thousands of dollars over the life of a large loan. And we can thank the internet for allowing us access to hundreds of lenders where we can explore what kinds of deals we can get.
That being said, it’s best to keep your interest rate shopping limited to a short window of time if your credit reports are being pulled as part of the process. There’s a chance that rate shopping could have a negative impact on your credit scores.
What is a credit inquiry?
An inquiry is a record of access into your credit report. So, when you apply for credit, the credit bureaus are going to make a record of who accessed your credit report and when, and place that record on your report.
Some inquiries, such as checking your own personal credit, are benign. These are referred to as “soft” inquiries. Other inquiries, such as applying for new credit, have the potential to impact your scores negatively. These are referred to as “hard” inquiries.
Hard inquiry vs. soft inquiry
The lender or creditor will check your credit report if you apply for a loan or a credit card. This will result in a hard inquiry on your credit report. Other credit checks resulting in hard inquiries include renting an apartment, buying a new cell phone plan, buying a new vehicle, and buying a house.
Since these applications are for credit, they result in a hard inquiry. Soft inquiries occur when someone accesses your credit to pre approve you for something or when you check your own credit report. They do not impact your credit score. Hard inquiries do affect your credit score and how potential creditors determine your creditworthiness, so you should keep hard inquiries to a minimum.
If you have multiple inquiries on the same type of product, the creditor will count it as one inquiry because they can see you are attempting to buy a home or a new vehicle. Hard inquiries will stay on your credit report for over two years, so make sure the application is necessary before submitting it. The good news is the impact a hard inquiry has on your credit report does lessen over time.
How are inquiries scored?
According to FICO, a hard inquiry on your credit report will drop your score by about 5 to 10 points. Multiple inquiries for multiple credit cards can drop your credit score and be a red flag to other potential creditors. However, if you have three inquiries for an auto loan within a 7-day period, it will count as one hard inquiry. This is because it’s obvious you’re shopping for a new vehicle, not only applying for three different credit cards at the same time.
It won’t affect your score when you’re shopping for the best rates, and you won’t get bad credit this way. When you’re shopping rates like this, make sure you keep the applications within 45 days of each other. FICO may find it suspicious if there are multiple inquiries for more than 45 days. A hard inquiry will make your score drop temporarily. And if you’re responsible with your credit, you can see some points come back within a few months.
Applying for multiple accounts vs. rate shopping
The sole reason the credit score exists is to help lenders predict risk. And research shows that applying for multiple new accounts in a short period of time is predictive of elevated risk.
Due to this fact, credit scoring models like FICO and VantageScore are designed to pay attention to the number of hard inquiries on your credit reports when calculating your scores. And a larger number of hard inquiries could translate into lower credit scores in some scenarios.
The exception to this rule is when you’re rate shopping. Your credit reports could easily get polluted with multiple hard inquiries in a short period of time when you’re trying to find the best financing offer available. But credit inquiries that occur as a result of rate shopping are not indicative of the same elevated risk mentioned above.
As a result, credit scoring models often treat them differently — provided that those inquiries all occur within a certain window of time and are from certain types of lenders. Both FICO and VantageScore scoring models include logic that protects your scores from the impact of rate shopping inquiries.
FICO’s rate shopping window: 45 days
In FICO’s scoring models, multiple credit inquiries within a 45-day window are treated as one shopping event, provided those inquiries are from mortgage, auto loan or student loan lenders.
For example, FICO can see you are rate shopping for a home loan, so they will count as one inquiry, as long as the applications all take place within their 45-day window.
Inquiries outside of the three categories mentioned above, such as credit card inquiries, are not protected, because consumers don’t typically shop around for the best rate on a credit card. So, if you applied for a mortgage on Oct. 1 and applied at a second lender on Nov. 01, the two mortgage inquiries would count as one for the sake of credit score consideration, because they were within 45 days of each other.
Be mindful of your credit applications and only make an inquiry when necessary.
VantageScore’s rate shopping window: 14 days
VantageScore’s logic is both more and less restrictive than FICO’s logic.
The window for VantageScore is 14 days versus 45 days for FICO. Omit, VantageScore models don’t include category restrictions when considering the impact of multiple credit inquiries. Instead, all inquiries that occur in a 14-day window only impact your credit scores as a single credit application event.
So, if you apply for a credit card on Oct. 1, an auto loan on Oct. 2, a home loan on Oct. 5, and two more credit cards on Oct. 8, all five credit card inquiries would count as one inquiry for credit score consideration, because they were within 14 days of each other. However, applying for two mortgages a month apart, as in the previous example, would count as two separate inquiries on your VantageScore credit score. So if you want to cover both bases, try to limit your loan shopping to a two-week window if possible.
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