When it comes to shopping for the right loan, it makes sense that you’d want to do your research in order to score the best rate possible. And the Internet has made it easier than ever to do so. But before you start comparing loans, it’s important to understand the effect this could have on your credit.
And the answer isn’t as clear-cut as you might think.
Whether or not comparing loans will affect your credit score depends on whether a hard or soft inquiry is required.
Soft inquiries happen when a business pulls your basic credit information without your directly applying for anything — for instance, when credit card companies check to see if you prequalify for a card. Soft credit checks have no impact on your credit report.
Hard credit inquiries come whenever you directly apply for a loan or new line of credit, such as a mortgage, car loan, or new credit card. The lender pulls your complete credit report to determine whether you’re a safe borrowing candidate.
Since you took the steps to apply, hard inquiries are considered “authorized,” and they do end up on your credit report and affect your credit score. Luckily, if your credit is otherwise in good standing, the effect is fairly minimal; your credit score will only drop by a few points, and it usually bounces back from the hit within six months. (However, the effect may be more impactful if your credit isn’t as strong.)
When credit checks are required
Hard inquiries may not be required until you’re further into the loan process. Lenders can get an idea of what interest rate you’d qualify for by performing soft inquiries using basic information including your name and annual income. So if you’re shopping around, this is the best way to look at all of your options.
However, to get an official rate quote, you will have to directly apply for the loan, which will result in a hard inquiry.
But here’s the good news: if you submit multiple applications for the same type of loan (say, a car loan) over a short period of time (usually between 14 and 45 days), it’s not considered risky behavior because it’s evident to the credit bureaus that you’re simply looking for the best deal. As such, credit bureaus will often count these multiple applications as a single hard inquiry.
(Note: This isn’t the case for credit cards. Submitting multiple credit card applications over a short period could not only bring down your credit score, it could also make you look like a risky borrowing candidate to lenders.)
How to shop for loans
In order to avoid damaging your credit as you shop for loans, make sure you’re aware whether your credit is being submitted for a hard or soft inquiry. Many websites will let you know, but if you’re not sure, call the company’s customer service to ask.
Also, make sure you’re protecting your privacy. A secure Web page will begin with “https,” so if you’re entering your social security number or any other sensitive personal information, make sure to double-check for that protocol.
If you’re having trouble getting approved for a loan, it could be that you need to fix your credit. For credit help, consider speaking with a credit repair expert. Lexington Law offers the legal expertise to help you repair your credit and ensure that your credit report remains fair and accurate.