When you're shopping for a new home or auto loan, you'll probably apply for several loans to compare terms and see which lender will offer the highest loan amount and the best interest rate. Or, if you're not sure about your credit, you may spend time shopping around to find a lender that you know will approve your application.
What you may not realize is that your mortgage broker or auto salesman may run your credit with several different lenders. Many are shocked to see multiple inquiries made to their credit report after applying for a mortgage or car loan. And once you understand that credit inquiries have a negative impact on your credit score, you may become worried that rate shopping will hurt your credit score. Here's what you need to know.
What Are Hard Inquiries?
Credit checks made when you apply for a loan are considered "hard" inquiries, meaning they're the result of an application you've made. These are in contrast to the "soft" inquiries that come from you checking your own credit or a company generating a promotional credit offer for you. Hard inquiries can hurt you. They account for roughly 10% of your credit score and remain on your credit report for two years. Only the inquiries from the past 12 months are included in your credit score, however.
What Rate Shopping Means for Your Credit
Many credit scoring calculations are forgiving when it comes to borrowers who are rate shopping—they don't treat all inquiries the same. In fact, mortgage, auto, and student loan inquiries receive special treatment because credit scorers realize that you are looking for the best rate—not trying to apply for several mortgages, auto, or student loans. The exact impact of multiple loan inquiries all depends on the credit scoring model that's used.
First, inquiries from these types of lenders don't affect your credit score for the first 30 days after they are made. Your credit score won't drop because of the loan application and it won't make it harder for you to get approved.
The 45-Day Window
Thirty days after you've made the first application, all the applications made within a period of time are treated as a single inquiry in your credit score. That time period varies from 14 to 45 days depending on the credit scoring model that's used to pull your credit score. The newest credit scoring models use a 45-day window for rate shopping. So, whether you make five or 15 applications, they'll count as just one inquiry for your credit score.
Always Proceed With Caution
It's worth emphasizing that the rate shopping exception for multiple inquiries only applies to mortgage, auto, and loan applications. If you're making multiple credit card applications, for example, each inquiry is treated as a single inquiry, no matter how many you make or the time period in which you make them. Your credit score can potentially drop with each new credit card application.
While multiple loan applications can be treated as a single inquiry in your credit score, even that single inquiry can cause your credit score to drop. However, the impact on your credit score should be the same as if you'd applied for just one loan. Also, the effect will decrease over time as you minimize your future applications and make all your payments on time.
Should I Still Rate Shop?
While you need to be smart (and cautious), don't let the fear of what could happen to your credit score keep you from shopping around for the best terms. Comparative shopping is always the wisest move to make, especially when you're financing a major purchase like a home or car. Shopping around ensures you get the best terms with a lender, which can save you a substantial amount of money in the long run.