Measure thrice before you cut once. When it comes to making a credit-related decision, you may want to measure far more than three times. In fact, you may want to make a profound research, shop for low personal loan rates, and make calculations before taking up a loan.
Rumor has it that every time you fill out an application form while shopping for loan rates, your credit score drops. It’s not quite so. Your credit score does lose a couple of points when the lenders you apply to perform your credit verification and make inquiries to credit bureaus. This is how they find out your trustworthiness and determine their lending risks to better assess the options they may offer. However, not all credit inquiries are the same, and not all of them steal from your credit score.
Ultimate truth about shopping for personal loan rates that hits your credit score
- Soft vs. Hard Inquiries. There are “soft” and “hard” credit inquiries. It’s the “hard” ones that can actually decrease your credit score.
- Shopping for Different Types of Loan. The type of loan you apply for determines how credit inquiry will impact your credit score.
- The Relevance of Inquiry. The age and relevance of inquiry determines the influence on credit score.
Soft vs. hard inquiries
All credit inquiries concerning applications for a new credit are hard inquiries. They are recorded on your credit file indicating riskier credit behavior. Hard credit report pull hits your credit score and causes its drop for 2-5 points. All credit report pulls that are not associated with attempts to get a new credit or account incur soft inquiry. These records won’t be reflected in your credit report. Thus, they have no impact on your credit score.
|Soft Inquiry||Hard Inquiry|
|Credit report check for the request that does not lead directly to a new credit account opening (when you check your own credit, someone makes identity check, your employee or insurer checks your credit history, or when a credit card issuer or personal loan lender makes initial credit check to pre-qualify or pre-approve you for a card or a loan)||Profound credit report check for the request that indicates an attempt to make a credit decision that involves a certain amount of credit risk (finalize application for a personal loan, credit card; business, student, auto or mortgage loan, credit limit change, new account opening, renting)|
|Won’t be reflected on your credit report||Will be reflected on your credit report|
|Never causes credit score drop||Causes credit score drop (1 inquiry=2-5 points)|
|The influence doesn’t change over time||Remains on credit report for 2 years, influences credit score for 1 year|
When you are shopping for best loan rates
When you are shopping for pesonal loan rates and fill out pre-qualification or pre-approval forms, you are most likely to get soft pulls which never hurt your credit score. Unless you finalize your loan application with a lender and encourage full credit report check, your shopping for rates won’t cause decrease of your credit score.
Shopping for different types of loans
When you are searching for the lowest personal loan rates online, you usually fill out multiple pre-qualification or pre-approval forms that allow lenders to make initial decisions whether to consider your request or not. You probably have noticed the pop-ups under APPLY buttons saying that it won’t affect your credit or FICO score. Believe it or not, but it’s true. To pre-approve or pre-qualify you for a loan, lenders usually need to check your identity and basic personal and financial data. Thus, they won’t perform a profound credit check, and you will save your precious credit score points.
However, if you decide to proceed with a lender and finalize your application after pre-approval, this lender will definitely make a hard pull to your credit report, which will be reflected both in your file and your credit score. So the more hard inquiries you get, the more 2-5 cuts from your credit score you experience.
Student, auto, mortgage loans
Once you fill out an application for mortgage, student or auto loan, you get a hard pull on your credit report, and your credit score goes down gradually. Every new inquiry will be reflected in your report. Unless you apply skills while shopping for these credit products.
In order to make searching for better rates fair, the latest credit score models, such as FICO 8 and VantageScore 3.0, had to evolve. Today applicants can submit multiple student, auto or mortgage loan applications for 30 days prior to credit check without hurting their credit scores. It won’t cause considerable damage to their three-digit score, as the systems recognize such behavior as shopping for rates and ignore hard inquiries during this period. These inquiries won’t be reflected in the reports pulled during this period.
Moreover, similar credit inquiries for the previous 45 days before calculating the score will be considered as one inquiry. In other words, 10 applications for auto loan will be considered as one and cause credit score drop for 5 points at most.
Shopping for business loans can cause both business credit score and personal credit score verifications. Even though both can be calculated relying on FICO models, both can be attained from Experian or Equifax, business and personal credit scores are different.
Impact on personal credit score
Lenders that provide small business loans can perform credit check of the person who makes loan request. In this case shopping for business loan rates works the same way as shopping for personal loan rates. Pre-approvals and pre-qualifications won’t be reflected in credit reports and thus won’t damage credit score. While profound credit verification performed by lenders after pre-approval will incur hard inquiry and cause slight personal credit score drop.
Impact on business credit score
Anyone who has the company’s official name and address can request its business credit report. For this reason business credit score survives any inquiry.
Still, there’s a trick. Small business is characterized by tight relationship between owner’s personal and business financial decisions. For this reason, personal credit score of the owner and business credit score of his or her company are interconnected and can impact each other.
For example, FICO® SBSS℠ model used to calculate business credit scores relies on both business and personal information of the owner. For this reason, if the lender uses this credit score model to assess applicant’s creditworthiness, this inquiry will most likely be reflected in the personal credit file of this applicant.
The relevance of inquiry
Hard credit inquiries remain in credit reports for two years and will have influence on credit score for one year if the score is calculated according to FICO model. Either from mortgage lender or from a credit union, all hard inquiries will cause a credit score drop of up to 5 points each.
However, you shouldn’t underestimate the value of inquiries in your credit report. Since new credit accounts for 10% of FICO calculation, even a couple of inquiries per year may have a significant impact on credit scores of those who have short credit history or insufficient account information.
Best practices for personal loan rates shopping
- Plan your shopping for loans. Depending on the type of loan you are searching for, make sure you understand how your loan applications influence your credit score and if they incur hard inquiry.
- Focus on the period of time. Shopping for student, auto or mortgage loan, make sure you apply to different providers within 30 successive days sharp. Thus you knit all your inquiries and make them value as one while scoring.
- Check your credit report before you start shopping for personal loan rates. If you find any inquiry that you can’t recognize, learn more about it. Hard credit report pull is possible only in case you authorize it by giving your consent or ticking the warning check-box. If you find an alien inquiry, it’s highly possible to be a mistake or even fraud. You should know that can dispute it and request it to be removed from your credit report. Only then you can safely shop for personal loan rates.
- Minimize the amount of inquiries to 1-2 per year. This golden rule suggests that you plan your account opening and take up not more than 2 loans annually.