Having a high credit score is vital when you are applying for loans because it shows lenders that you are creditworthy. However, each application for a new loan can bring down your credit score.
Inquiries
Each time you apply for a loan, the lender will pull your credit score, which results in an inquiry being noted on your credit report.
Time Frame
Each inquiry remains on your credit report for two years after the lender pulls you credit report. However, only inquiries from the previous year have a significant effect on your score.
Effects
According to the FICO scoring model, recent applications for new credit account for 10 percent of your credit score. The more credit you have recently applied for, the lower your score will be.
Considerations
The scoring model accounts for the fact that people shop around for auto loans and mortgages. So all inquires for these types of loans within one month of each other will count as one inquiry for scoring purposes. For example, if you submit applications to six lenders for a mortgage within a month of one another, six inquiries will appear on your credit report, but they will be treated as one for scoring purposes.
Purpose
Your credit score decreases with each application for credit because you appear to be a greater default risk when you are applying for many new lines of credit in a short period of time.
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