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How to Shop for a Loan Without Damaging Your Credit Score

August 16, 2017

Not many people know that when they apply for a loan, the inquiries on their credit that lenders pull up can harm their credit scores.

What is an inquiry?

An inquiry is a background check on your credit. By looking at your credit score, payment history, and the accounts you have open, loan lenders determine how big of a risk it is to lend you money. They use that information to decide what kind of loan and interest rates they are willing to offer.

The catch is that an inquiry is a negative thing to show up on your report. Inquiries lower your credit score, and it gives potential lenders the impression that you’re in need of more money than what you can afford.

So how do you search for the best loan you can apply for without digging yourself a hole? Here are some things you should keep in mind in order to do loan shopping the smart way.

Which inquiries damage your credit score?

Inquiries for the following four types of loans can be negative: credit card applications, mortgage/refinancing loans, auto loans, and store credit cards or consumer loans.

Credit card inquiries are the most harmful.

Because you can open as many cards as you qualify for, you can appear to be short of funds, making you a high-risk borrower for lenders.

Mortgage and auto loan inquiries affect your score less.

Even if you have many of these, you’ll end up with one loan for a car or a house, so lenders have fewer grounds to fear that you won’t pay them back on time.

Keep in mind that only authorized have the power to affect your score.

A business pulling up your report during a service/product transaction doesn’t affect your score. You pulling up your own report doesn’t affect your score either.

Shopping for the right loan without risking your credit score

The credit scoring model is designed to allow loan shopping. An inquiry doesn’t affect your credit score until 30 days it was made, meaning lenders you go to within that time frame won’t see a decreased score on your report. Without this system in place, your credit score would keep falling as you go from lender to lender, and each offer you get would be worse than the last.

FICO groups the same type of loan inquiries into one as long as they were made within a certain time period. Depending on which scoring model your lender selects, this could be 14 or 45 days. So shop for loans within a shorter period of time, and you won’t see a big drop

Inquiries matter before big financial moves

The benefits of finding the right loan far outweigh the costs of a few inquiries. If you have an excellent credit score, these inquiries won’t really affect you.

But knowing how inquiries can affect your score can prepare you in advance for major financial moves. You might need a picture perfect credit score before applying for mortgage or refinancing your car. Then, we advise to go easy on any new credit card applications and condense your loan shopping period within a month.