Even if you are rushing to refinance your mortgage before the Federal Reserve hikes interest rates, you should still take the time to shop around.
Having said that, I know some folks are nervous about having their credit examined by multiple lenders. They fear that if they shop around, all those credit inquiries from lenders — known as “hard” inquiries — will lower their credit score just when they need it to be as high as possible. “Soft” inquiries, such as when you check your own credit, do not affect your credit score.
For a series of columns on myths about credit scoring, I asked representatives from the three major credit bureaus — Equifax, Experian, TransUnion — and FICO, the company that created the credit-scoring model used by most lenders, to address some common misconceptions. This time they answer a concern by some readers about the impact to their score when shopping for a loan. Let’s start with Can Arkali, principal scientist for FICO. I asked: If someone is shopping for an auto loan or, as many people are now, a mortgage, will every inquiry count as a hard pull on their credit file, thus hurting their credit score?
Arkali said that when evaluating inquiries, the FICO model uses “shopping windows” to allow consumers time to search for new credit.
“Looking for a mortgage, auto or student loan may cause multiple lenders to request a credit report, even though the consumer is looking for only one loan,” he said. “To address this, FICO scores ignore mortgage, auto and student loan inquiries made in the 30 days prior to scoring. So, if the consumer finds a loan within 30 days, the inquiries won’t affect the FICO score while the consumer is rate shopping.”
Arkali also said that FICO scans credit reports for mortgage, auto and student loan inquiries older than 30 days. If such inquiries are found in a typical shopping window, they count as just one inquiry. In the newest versions of FICO, the rate-shopping period is any 45-day span.
But let’s say you fall outside the shopping window. You may not have to worry.
“The impact from applying for credit will vary from consumer to consumer based on their unique credit histories,” Arkali said. “In general, credit inquiries have a small impact on one’s FICO scores. For most consumers, one additional credit inquiry will take less than five points off their FICO scores. For perspective, the full range for FICO Scores is 300 to 850. Inquiries can have a greater impact if a consumer has few accounts or a short credit history.”
Here’s what the credit bureaus had to say about the issue of rate shopping and hard inquiries.
Heather Battison, vice president for TransUnion, said a hard inquiry could lower a VantageScore by 10 to 20 points. However, the decrease may not last long if you pay your bills on time and reduce the debt you carry.
According to Jason Flemish, vice president of global customer care for Equifax: “Hard inquiries may have a limited effect of just a few weeks or potentially up to 45 days, depending on the credit-scoring model being used”.
The shopping window does not apply to individual credit cards or when you apply for several credit cards at once.
Shopping for a single loan is different behavior than someone trying to open several credit accounts in a short period. To a lender that may indicate the person may become overextended and is a riskier borrower.
Flemish recommends that you pull your credit scores and reports before shopping for any credit. The official site to get your free reports is annualcreditreport.com.
Check with your credit card company because you may have access to a free score.
The more you know about how credit scoring works, the better consumer you’ll be.
Michelle Singletary welcomes comments and column ideas. Reach her in care of The Washington Post, 1150 15th St. N.W., Washington, DC 20071; or firstname.lastname@example.org.