Can Rate Shopping hurt you?

Could rating shopping or shopping for the best deals on a mortgage, auto loan or even an equipment lease affect your credit score?

First, let’s understand this about your credit score. Having a good credit score can save you a lot of money. It could help bring down the interest rates and reduce the down payment required. With good credit, you can qualify for better credit cards that offer lower rates and better incentives.

But it’s not always so simple. When you’re looking for the best deal on an auto loan, mortgage, or equipment lease – it’s important to not get fixated on just the rate. Shopping around can have negative effects and potentially lower your score. If shopping for the best rates could affect your credit score, then what’s the point, right? Why bother looking for the best terms, anyway?

Now, let’s be clear, rate shopping does affect your credit score. How? Every time you apply for a new credit line, you’ll be hit by a hard inquiry – there’s no getting around it. Hard inquiries affect your credit score significantly. Many experts state that Inquiries make up 10% of your credit rating. So, shopping for the best rates, applying with one lender to another, is not exactly a smart thing to do.

Let’s be clear though, with certain auto loans and mortgages, Credit Agencies do allow for some level of shopping. Typically they allow you to make multiple inquiries within 30 days. The bureaus look into consideration the type of credit and loans that are being applied for, before classifying multiple inquiries as one hard pull. The point here is – credit reporting bureaus aren’t dumb and can tell the difference.

In spite of all that, you should know that an inquiry could still have a negative effect on your score. Only a few situations give you this leeway, and it only applies to mortgages and auto loans in most cases. That’s why it doesn’t really make sense for you to apply for 10 to 15 credit cards over 4 to 8 weeks – you will only end up getting a lot of hard inquiries, which will wreck your credit score.

 So what should you be doing instead?

While we applaud you for being an informed consumer and shopping for the best rates. There are better ways to go about it. We recommend doing thorough research on the best institutions before handing over your credit application. There are plenty of sites that allow other consumers to provide their credit profile and rates that they received. This will allow you to get a general idea of what to look for.

One more thing that could help is to apply for credit accounts of just one type at a time. So if you’re shopping for a mortgage loan, wait for a while before you apply for an auto loan for a new car.

When you apply for too many loans at the same time, it sends out an impression that you are irresponsible at handling your debts and are in a rush for cash.
We see this in Equipment Finance all the time. A Business will come to us with their credit application and we’ll discover a dozen inquiries in the last 2 months. In situations like that, we’ll have no choice but to decline from working with the business. Truthfully, Most lenders are wary of offering credit to businesses like that.

Another thing to make note of, be wary of providing your personal information to certain people. There are countless stories of auto dealerships doing hard pulls on your credit without clear authorization. While you can be outraged all you want – the damage is already done. Use common sense and good judgement before providing essential information like your social security number to anyone.

 Summary

There’s no question that hard inquiries will reduce your score, but it’s something you have to accept. Minimizing the number of inquiries you receive will help ensure your credit score stays healthy. We recommend watching your credit closely, examine the credit report and if there are any inaccuracies of any sort, be sure to dispute them. Especially with all the hacks and leaks at reporting agencies – One can never be too sure. Just be a little cautious, do your research and be smart before go rate shopping.

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