How Will Loan Shopping Affect Your Credit?

One of the best moves to make when you’re preparing for a home or car purchase is to shop around for the best interest rates. A lower interest rate results in a lower monthly payment and lower overall cost of borrowing. You’ll want to move quickly when you’re shopping for a loan. Otherwise, the multiple inquiries could impact your credit score.

When you rate shop, your credit report may show multiple inquiries from each of the lenders that checks your credit to qualify you for the loan and set your interest rate. If you’re familiar with how credit scores are calculated, then you probably already know that inquiries are 10% of your credit score. Even if inquiries don’t cause a huge drop in your credit score, they could affect your approval since lenders also consider how recently you’ve applied for new credit.

Fortunately, the credit scoring calculation has a way to handle these inquiries that won’t hurt your rate shopping. While you’re rate shopping, the credit scoring calculation ignore loan-related inquiries. Then, once you’re done shopping, all the rate-shopping inquiries made to your credit report in a 14- to 45-day window are treated as just one inquiry. The exact time frame depends on the credit scoring model the lender uses. (The latest credit scoring models leave a bigger window for rate shopping.)

Avoid applying for other types of credit while you’re rate shopping since this would result in additional inquiries. Since these inquiries aren’t related to your loan shopping, they will affect your credit score. It’s a good idea to avoid applying for any new credit in the months leading up to your loan application, anyway. Taking on new credit – even shopping for new credit – can affect your interest rate and loan approval.

Only inquiries in 12 months are included in your credit score and fall off your credit report after 2 years. This is a much shorter time period than other types of negative information which stays on your credit report and is included in your credit score for seven years (10 years for some bankruptcies).