Rate shopping – it’s the responsible thing to do when shopping for a loan, right?
In reality, that answer is a bit more complicated than it seems. That’s because there’s a fine line between responsible rate shopping and taking an unnecessary hit on your credit score.
Here’s how you can tell the difference so you don’t end up crossing that line.
What happens when you’re shopping for a loan?
Did you know that your credit score could take a hit when you submit a loan application?
That’s because of something called a credit inquiry, which can occur with each application. There are two types: one type, a hard credit inquiry, affects your credit score. The other type, a soft credit inquiry, does not.
What’s a hard credit inquiry?
According to credit reporting agency Equifax, a hard credit inquiry occurs “when a lender or company makes a request to review your credit report as part of the loan application process.”
Therefore, if you apply for credit, there will be a hard inquiry.
What’s a soft credit inquiry?
A soft credit inquiry doesn’t happen when you’re submitting an application for credit. Therefore, it doesn’t affect your credit.
Credit reporting agency TransUnion describes a soft credit inquiry as “a more routine check that can be done without your permission.”
This type of inquiry happens when someone is checking your credit for other reasons. Experian, another of the big three credit reporting agencies, lists a few such reasons as such:
- Pre-screened offers for credit.
- Account reviews by your existing lenders.
- Requests related to employment.
- Requests for insurance purposes.
- When you request your own credit report.
How do inquiries affect your credit score?
Essentially, applying for too many loans or lines of credit can make it seem as though you’re overextended and desperately need credit to meet your needs.
And since lenders naturally see this as a risk, these large amounts of hard credit inquiries can negatively affect your credit score.
How much does this affect your credit score? According to MyFico, it depends on your credit history:
“For most people, one additional credit inquiry will take less than five points off their FICO Scores. For perspective, the full range for FICO Scores is 300-850. Inquiries can have a greater impact if you have few accounts or a short credit history.”
No big deal, right? Well, as long as you don’t pull too many hard credit inquiries. Because when you hit that critical number, statistics start to hurt you:
“Large numbers of inquiries also mean greater risk. Statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports.”
That said, it’s important to keep this in perspective, as inquiries are not the greatest factor in your credit score:
“While inquiries often can play a part in assessing risk, they play a minor part. Much more important factors for your scores are how timely you pay your bills and your overall debt burden as indicated on your credit report.”
In other words, your payment history and credit utilization are far more important. That said, the last thing you want is to lose out on a loan because you filed too many applications in search of the best interest rate.
So how can you make sure that doesn’t happen?
Can you protect your credit score while loan shopping?
Lenders know that putting in more than one loan application isn’t always an act of desperation. Rather, it’s a search for the best rate and terms.
So how can a lender tell the difference between “too many” hard credit inquiries and rate shopping? MyFico explains how:
“FICO scores ignore inquiries made [on mortgages, auto loans, and student loans] in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping.”
That’s great for the first 30 days, right? But you still don’t want your credit score to take a hit after you’re finished rate shopping. If you do it right, it won’t:
“In addition, FICO Scores look on your credit report for rate-shopping inquiries older than 30 days. If your FICO Scores find some, your scores will consider inquiries that fall in a typical shopping period as just one inquiry.”
This typical “shopping period” can be as low as 14 days (when using older versions of FICO’s formula) or go up to 45 days (when using newer versions of the formula). The formula used depends on the lender checking your report.
Use shopping periods to your advantage
How can you maximize your rate shopping and loan application process to have a minimal detriment to your credit score? Shop fast and for the same amount.
If you apply for all the same types of loan (an auto loan, for example) and for the same amount ($20,000 for example), then that sends a clear signal that you’re rate shopping.
And, since you won’t be able to tell which model of the FICO score your lender is pulling, go ahead and try to keep it all within the shortest possible “shopping period” – 14 days.
Keep in mind that varying your loan amount or throwing a different type of loan into the ring (or worse, a credit card, which doesn’t fall into the same principles as loans) will result in another hard credit inquiry. Avoid doing this if at all possible.
In the end, if you shop for rates by applying for the same type of loans for the same amount within 14 days you won’t hurt your score. And if you find a lower rate by doing so, you’ll end up paying less over the life of your loan.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|