Will rate shopping hurt my credit scores?

Young couple looking at blueprints and a computer to find the best rate for a mortgageImage: Young couple looking at blueprints and a computer to find the best rate for a mortgage

In a Nutshell

Getting a handful of quotes can help you find better rates and terms on your next loan, but it might temporarily ding your credit. To lessen the effects of rate shopping, it could pay to submit all of your loan applications within a short time span.
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If you’re planning to take out a loan, rate shopping makes sense if you want to compare offers and identify the best terms for your situation. The downside? It could bruise your credit.

Many people face this dilemma, whether they’re looking to take out a mortgage, auto loan or other type of debt. Even a slightly lower interest rate can add up to big savings over the life of a loan, so it’s best to gather and compare several quotes from different lenders.

But lenders will typically conduct a hard credit inquiry when you submit your application — and an influx of these inquiries on your credit reports may temporarily ding your credit scores.

Read on to find out how this happens and how to lessen the impact on your credit.

What’s the purpose of rate shopping?

Rate shopping — the process of gathering quotes from multiple lenders and comparing offers — can help you spot better loan terms and potentially save money on interest.

When you apply for a loan, the lender pulls your credit profile, reviews your borrowing history and decides whether you meet its requirements. If approved, the lender will show you the loan terms and rate you qualify for.

Does rate shopping hurt your credit?

Because rate shopping often involves applying for several loans within a short time frame, this practice can potentially ding your credit — at least temporarily. But it depends on whether the lender does a soft or hard credit pull

Do soft credit pulls affect your credit scores?

Soft inquiries won’t affect your credit scores. This type of inquiry can occur when a lender prescreens you for a loan or credit card. This might happen if you apply for prequalification for an auto loan, credit card or personal loan, for example. Keep in mind that prequalification doesn’t guarantee loan approval — and your loan rate and terms may change after you submit a formal application.

How hard credit pulls affect your credit scores

Hard inquiries show other lenders that you’re looking to borrow money. These inquiries usually show up on your reports when a financial institution checks your credit as part of a lending decision — like when you apply for a mortgage, auto loan or credit card. According to credit-scoring company FICO, a single hard inquiry may lower your FICO score by up to five points and remain on your credit reports for up to two years.

Credit bureaus may include both hard and soft inquiries on your credit reports, but only the hard inquiries count toward your credit scores.

Tips for rate shopping without hurting your credit

Having a rate-shopping strategy can help you find the best rates for you while potentially avoiding the impact of multiple hard inquiries on your credit.

Check your credit

Because your credit scores are calculated based on the information in your credit reports, it’s a good idea to keep an eye on this information. Get a copy of your credit reports and read through them. If you spot errors, you can dispute them with the credit bureaus.

Checking your credit scores can also help you get a sense of which lenders might approve you for a loan and the rates you might qualify for. In general, lower credit scores could mean higher rates. Checking your own credit scores is treated as a soft inquiry, so it won’t affect your scores.

Do some research before you apply

Getting as much information as you can before you apply for a loan will help you weed out certain offers. Ask potential lenders about features such as the annual percentage rate, or APR, loan requirements, available loan terms and fees so you can begin to compare lenders.

If a lender offers the ability to apply for preapproval or prequalification without a hard credit pull, you get a sense of the estimated loan amount, terms and rates you might qualify for without affecting your credit. But keep in mind, you’ll still need to apply — and if you qualify, your loan terms could be different.

Limit your applications to a short window

Credit-scoring models can account for rate shopping in the way they calculate your credit scores. Some credit-scoring models consider multiple inquiries within a 14-day window as just one inquiry.

But the exact window depends on the credit-scoring model the lender uses. For example, VantageScore 3.0 counts multiple credit inquiries within a 14-day window as just one inquiry, while newer FICO scores treat multiple inquiries as a single inquiry if you made them within 45 days. Since you probably won’t know which credit-scoring model the lender is using, it might be best to do all your rate shopping within 14 days.

The exception here is credit cards. Applying for more than one new credit card within a short time period could signal to lenders that you’re strapped for cash. This may cause lenders to view you as a risk, and they may hesitate to extend credit.

Apply for only one loan type at a time

If you’re planning to take out an important loan soon, such as a mortgage, avoid applying for other types of loans at the same time. If you apply for other loans or credit, those hard credit inquiries will show up on your credit report as separate inquiries — even if you apply within the same 14-day time frame.

Next steps

Rate shopping could be a good move if you want to save money on your next loan. Your credit scores may drop slightly in the short term, but you could save a lot in interest and fees by comparing loan offers.

Once you have the loan, you can continue building credit by making payments on-time and in full as well as keeping your credit utilization low. Only apply for credit you need and consider leaving your credit card accounts open to build a lengthy credit history.

About the author: Kim Porter is a writer and editor who has written for AARP the Magazine, Credit Karma, Reviewed.com, U.S. News & World Report, and more. Her favorite topics include maximizing credit card rewards and budgeting. Wh… Read more.