When buying a house, interest rates matter. Even a slightly higher interest rate can increase the amount that you have to pay on your mortgage. For example, an increase of as little as one or two percent over a 30-year mortgage could turn into tens of thousands of dollars more that you'll pay over the lifetime of your mortgage.
So it makes sense to shop around for the lowest possible rate you can qualify for. However, consumers are also aware that inquiring too many times on a loan can have a negative impact on your credit scores (ultimately increasing the interest rate that you pay!)
You're stuck between the proverbial rock and a hard place: On the one hand, you need to shop around for a mortgage. On the other hand, shopping around too much is said to hurt your credit scores. So how can you get a lower interest rate without shopping around too much?
I went straight to the source for the answers -- I interviewed representatives from FICO and from one of the three main credit bureaus, Experian -- to find out exactly how you can find the balance between rate shopping and credit score impact. I wanted to show you how you can get the best of both worlds! FICO scoring models are the most widely used credit scores around, although there are other credit scores that some financial institutions use. And there are more than just three credit bureaus but Experian, Equifax, and TransUnion are the three main credit reporting bureaus that financial institutions use.
In this blog post (and the one to follow next week), I'll reveal exactly what the experts suggest:
The first thing you need to know, says Anthony A. Sprauve, Director, Public Relations at myFICO/FICO Score, is that there are two types of inquiries - hard inquiries and soft inquiries. "A hard inquiry is when you are applying for new credit. A soft inquiry is when someone is pulling your FICO Score for marketing other purposes [such as when a landlord or potential employer might pull your credit]," he explained. "Soft inquiries have no impact on your FICO Score. Hard inquiries only hurt your score if there are several of them in a short amount of time," he said.
But don't worry! That doesn't mean you can't go rate shopping for the best rates you can qualify for. There is an exception on two specific types of loans -- mortgages and auto loans. "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."
It's important to note that, for FICO scoring models, this only applies to two types of loans -- mortgages and auto loans -- and the same can't be said for other types of credit applications (like credit cards, lines of credit, etc.).
But how does your credit score know if you are rate shopping or applying for loans? Do you have to do anything to tell them? "The FICO Score is smart enough to recognize when someone is rate shopping and will ignore those inquiries within a 45-day window," explained Mr. Sprauve.
And Maxine Sweet, vice president of Public Education at Experian, explained further: "An inquiry is automatically added to the report at the moment of access and because it includes the identification of the company/kind of business (KOB) that made the inquiry, it automatically can be identified by the scoring model as being related to a mortgage, auto loan, etc. No action is needed from the applicant to indicate that they are rate shopping"(instead of seeming like they are applying for a dozen mortgages).
Maxine Sweet added that inquiries for these two types of loans, when made within the short (30-45 day) window of time (or within a 14-day rolling period for some scoring models), wouldn't count against you. But she also made another good point that isn't considered: "So, even if you have recent hard inquiries, they account for very few negative points in scoring models and are even less negative within a few months. The reason they have so much visibility as a negative factor [on your credit scores] is that the FACT Act required that inquiries be disclosed as a negative factor influencing your score if they have any negative impact at all. Thus, many consumers become alarmed and place far too much emphasis on them because they see them listed as a factor." Ms. Sweet later added, "It is safe to say that inquiries will be the last (and least significant factor) and no one will have poor scores if inquiries are the only negative factor in their history."
Stay tuned. My interview isn't over yet! Check in next week and I'll share with you what these two experts tell us to do to minimize the impact on our credit while maximizing our rate shopping...