Do you ever wonder about how applying for new credit affects your credit scores? It’s not uncommon for people to worry that new credit applications can hurt their credit scores, and some even worry that checking their credit could cause their scores to dip as well.
The truth is, there’s not as much to worry about in terms of credit inquiries as one might think. Here’s what you need to know.
First Understand That There Are Two Types of Credit Inquiries
There are two types of credit inquiries, hard credit inquiries and soft credit inquiries:
Hard credit inquiries are the result of a voluntary submission of an application for credit, and they generally only take up to five points off your credit scores each.
Soft credit inquiries are the result of a few things. They happen when you check your credit, they happen when a company checks your credit to send you a promotional offer, and they happen when an existing lender of yours reviews your credit. Soft credit inquiries have no effect on your credit score whatsoever.
Now that the difference between hard and soft credit inquiries is cleared up, here’s what you need to know about preventing too many hard credit inquiries from hurting your credit scores.
How to Keep Hard Credit Inquiries From Hurting Your Credit Scores
In the grand scheme of things, credit inquiries don’t have a massive impact on your credit score. Hard credit inquiries only knock your scores down by a few points each, and soft credit inquiries don’t affect your score at all.
That said, there is a way to ensure that the impact of a hard credit inquiry is even smaller. It’s called rate shopping. Here’s how to do it:
1. Apply for One Type of Credit at a Time
The first step in making it clear you’re rate shopping rather than trying to get a whole bunch of new credit is to only apply for one type of credit at a time.
That means you should only apply for mortgages if you’re looking to buy a home, and only apply for auto loans if you’re going to buy a new car. And, unless you absolutely need to, don’t apply for credit cards while also applying for these loans.
2. Apply for the Same Amount of Credit
The next step is to fill out all of your credit applications for the same amount.
In other words, don’t apply for a mortgage of $300,000 with one lender and $400,000 with another. Multiple applications of the same type and amount will clearly show that you’re rate shopping.
3. Complete Your Applications in One Month or Less
Finally, you can show you’re rate shopping by submitting all of your credit applications within a short time frame. More specifically, do all of your rate shopping within 14-45 days.
Here’s why, according to myFICO:
“ … FICO Scores look on your credit report for mortgage, auto, and student loan 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. For FICO Scores calculated from older versions of the scoring formula, this shopping period is any 14 day span. For FICO Scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span.”
As for the other major credit score, VantageScore®, it “treats multiple hard inquiries by utility companies, as well as those made in connection with mortgage and auto loans, as one inquiry, provided they are made within rolling two-week window.”
Since companies can use any credit score or any version they’d like, the safest bet when rate shopping might be to keep it within the shortest time frame of 14 days.