Your credit reports from the Experian, Equifax and TransUnion credit bureaus get checked for various reasons, from employment or insurance screening purposes to credit card and loan applications. Loan prequalifications typically result in a cluster of report viewings that appear on your records and have some effect on your credit score.
Definition
Prequalifying for loans means shopping around for automobile financing, a student loan, a mortgage or another large loan to get the best interest rate, the My FICO website advises. Prequalifying also gives you power as a buyer because it shows that you're serious and have the financial ability to make the purchase. Banks and loan companies instruct you to fill out an application so they can review your credit reports and other information before approving you. Their research results in "hard inquiries" on your credit reports, which means that the inquiries are visible to other who review the reports, according to the LendingTree loan website.
Effect
Hard inquiries affect your credit score, which takes information on your credit reports into account. The My FICO site explains that such inquiries can pull down your score by as much as five points, with multiple inquiries within a short time frame being especially harmful. A person with six hard or more inquiries is up to eight times more likely to file for bankruptcy than someone with zero inquiries, according to the My FICO site.
Prequalifications
The My FICO site advises that credit scoring formulas taking loan shopping and prequalifications into account and don't penalize you if you consolidate your applications into a short time frame. This time frame ranges from 14 to 45 days, depending on the exact scoring model being used by the score provider, which might be FICO or one of the three credit bureaus. All applications for a particular loan type that fall within that period count as one inquiry for scoring purposes.
Considerations
You can check your own credit reports before loan shopping without hurting your credit score. Such self-checks result in "soft inquiries," which aren't factored into your credit score or viewable by lenders who pull your credit reports. This exception allows you to review your credit files and dispute any mistakes that could result in denial of your applications before you start looking for financing. The Federal Trade Commission explains that the Annual Credit Report website lets you get report copies for free every year; the dispute process is also free and requires the credit bureaus to investigate and correct your records in 30 days.
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