When you apply for credit or a loan, the lender must look at your credit report to check the strength of your credit, a process called an inquiry. You naturally want to shop around to get the best deals but may worry that if too many creditors are looking at your score, it could lower the score. While this is true, it's probably not something you have to worry about.
Why You Should Worry
Suddenly acquiring a lot more credit seems like a risky behavior to the credit companies, and they can lower your credit score as a result. Though it may be a small difference, that small amount could mean a big difference in your loan rates and the amount of money that you pay over the lifetime of the loan you get. When shopping for the best rates, you need your credit score to be as high as possible.
Mortgage, Auto and Student Loans
When you apply for a credit card, you typically know up front what type of rate you can get on it. With mortgages, auto and student loans, however, you want to shop around so you can get the lowest rate. The credit bureaus know this and do not penalize you for shopping rates -- these types of inquiries are in a different category than credit card inquiries. All of the inquiries on your account within a 45-day period for these types of loans will count as just one inquiry on your account.
The Negative Effect
Each inquiry on your account can reduce your credit score by 5 points, according to myFICO. That's enough to drop you into second- or third-tier ratings, though. Inquiries for credit cards can be particularly damaging because your score can drop 5 points for each one.
Mitigating the Effects
When shopping for rates, do your best to keep all of your shopping within the 45-day window. This is best anyway, as rates change on a daily basis. Even if your score does take a small hit from the credit inquiries, you can quickly raise it back up by being financially responsible -- paying your bills on time and working to reduce your debt.
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