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.
But having said that, I know some folks are understandably 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 report, 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.”
He 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, Arkali said.
By the way, for clarity, I may refer to your score in the singular, but in fact there are multiple versions of credit scoring models, so you don’t have just one credit score. You may be familiar with FICO, but there is also VantageScore, a model developed by the three major credit bureaus.
But let’s say you fall outside the shopping window. You may still 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,” he said.
Just so you know: The shopping window does not apply to individual credit cards or when you apply for several credit cards at once. That makes sense to me. Shopping for a single loan is different behavior than that of someone who is trying to open several credit card accounts in a short period of time. To a lender that may indicate the person may become overextended and therefore 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 bottom line: “You can shop for the best auto loan and mortgage rates without worrying about your credit scores,” said Rod Griffin, director of public education for Experian.
The more you know about how credit scoring works, the better consumer you’ll be.
Michelle Singletary can be contacted at:
michelle.singletary@washpost.com
Twitter: SingletaryM
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