Consumers face a "catch-22" situation when it comes to loans. On the one hand, it's important to shop around to get the lowest interest rate you can. On the other hand, there's the perception out there that shopping around for loans too much will hurt your credit.
To help shed some light on the answer, I spoke with representatives from myFICO and from credit bureau Experian. Their useful answers will steer you in the right direction (but remember that FICO has many different models and there are other brands of models, and there are more credit bureaus than Experian -- so you might discover some minor differences when you shop for rates).
In a recent interview I shared what our experts said about inquiries, rate shopping and credit scores. Today, I'm going to share with you what they said about tips and best practices that consumers can do to help find great rates without impacting their credit score:
• Anthony A. Sprauve, Director, Public Relations at myFICO/FICO explained why inquiries are viewed as negative on credit reports: "Research has shown it to be a red flag when someone applies for several new credit accounts in a short amount of time. It is best practice to only open new credit when you need it. The exception is when someone is shopping for a good loan rate." So it's okay to look around for good rates but there are some parameters that you should adhere to.
• Maxine Sweet, Vice President of Public Education at Experian, said that a credit report "includes the identification of the company/kind of business (KOB) that made the inquiry." Consumers can rate shop for mortgages and auto loans without a negative impact on their credit scores.
• Ms. Sweet also pointed out that all inquiries will show up on credit reports but in terms of the negative impact of hard inquiries, they won't all count against you.
• Mr. Sprauve said that "The FICO Score recognizes when someone is shopping for a mortgage or [auto loan] and disregards multiple inquiries when they happen in a 45-day window." Therefore, if you are going to shop for rates for your mortgage or auto loan, make sure that you do so within a 45 day window. Spreading it out over several months or years could have a negative impact on your credit in a way that a 45-day rate shop will not.
• "I do recommend that consumers stop applying for new credit in the 3-6 months before applying for a rate sensitive loan such as a mortgage or auto unless they know that their credit history is really strong. If you have marginal scores, you don't want inquiries to make them even a few points lower if that might drop you into a higher price point," suggested Ms. Sweet.
Rate shopping and credit inquiries can be complicated, and it's hard to get all of the nuances and subtleties during an interview -- sometimes a quote can strip out some of the context and meaning that should help you. So what I've done below is make a couple of clarifications to provide a fuller, clearer answer to some of the points made in the last article:
• A soft inquiry comes from accessing your own report for your personal review or someone pulling your credit report (not your credit score) for promotional purposes or for account management purposes. Soft inquiries do not impact your credit score.
• We suggested in the last article that FICO ignores all but one of the auto loan or mortgage inquiries. This was a quick way of saying something a little more detailed than that: What really goes on is that FICO sees all of your hard inquiries, of course, but counts certain types of inquiries as just one inquiry. They don't actually "ignore" your other inquiries!
• We've mentioned auto loans and mortgages in the previous article but there are other types of loans that fall into this as well. Student loans are another type of inquiry that are relevant here.
• FICO scores ignore auto loan inquiries, mortgage inquiries, and student loan inquiries until they are 30 days old. After they've become older than 30 days, FICO scores consider any of these inquiries that are less than a year old but within 45 days of each other as one inquiry. I realize that sounds complicated but it's important that you understand the full impact of these inquiries on your credit score.
Consumers who are looking for higher-ticket loans, like mortgages and auto loans and student loans, should shop around because it could save them thousands of dollars when repaying. But many people are concerned about making too many inquiries on their credit. Our experts from FICO and Experian assure us that mortgages and auto loan inquiries will appear on your credit report but will only count once (even if you make several inquiries) as long as they are done within a short period of time (which I've detailed above as approximately a 45 day period, but can vary depending on the model used). Moreover, inquiries shouldn't have a major impact if you have healthy credit because of good credit habits already.
I'd like to thank our guests for taking the time to be interviewed -- their insight has been helpful and their ideas and information can have a positive impact on your credit and can help you save thousands of dollars in mortgages and loans!