How Rate Shopping Can Impact Your Credit Score

Blog Post10/08/2019
Credit Advice
How Rate Shopping Can Impact Your Credit Score

A house and car are two of the biggest purchases you’ll probably make in your life. Shopping for them can be equal parts exciting and stressful. It’s important to take your time and find the options that work best for you within your budget. During your search, think carefully about how much money you’ll be using as a down payment, and how much you’re comfortable borrowing.

Just like you can compare prices and terms to find a great deal on a home or car, the same is true for loans. But even during the fun of home or car shopping, you should be mindful of the number of hard inquiries on your credit report. Hard inquiries happen when lenders access your credit report so they can make a decision about whether to give you credit. When you apply for a mortgage or car loan, lenders will make a hard pull of your credit report. These hard inquiries will often lower your credit score. To minimize the impact of these inquiries, try to do most of your mortgage and auto loan shopping in a short time.

Credit models and loan shopping

It’s a good idea to bunch your loan applications because of how loan rate shopping is treated by two frequently used models, VantageScore® and FICO®. VantageScore 3.0 counts all inquiries made within a 14-day period as just one inquiry on your credit report if they’re all for one specific type of loan, like a mortgage or auto loan. FICO treats multiple inquiries in a similar way, but you’d need to do it within 45 days for it to count as only one inquiry. By limiting your loan applications to a short window, you can reduce the negative impact to your credit score. You might want to consider doing all your rate shopping within 14 days to limit the impact no matter which scoring models your lenders use.

Start getting documents together early

The documents you’ll need for an application will vary based on the type of loan and the lender(s) you work with. Get the relevant financial documents ready in advance to help speed up the application process and finish your rate shopping in a short time to increase the chance that your inquiries are treated as just one inquiry. It can be a project to get all the information together you need, but it’s a good opportunity to organize your finances for the long-term. Back up your information digitally and have a secure place for hard copies of your documents—you’ll likely need them again someday.

Rate shopping is important but often overlooked. With a plan, you can reduce the negative impact many hard inquiries could have on your credit score and keep control of your credit health as you take this exciting step in your financial journey.

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