Understanding Rate Shopping and Its Impact on Your Credit Score

When it comes to securing a loan or credit card, getting the best possible terms is crucial. This is where rate shopping comes into play. Rate shopping involves comparing interest rates, fees, and other terms from multiple lenders to ensure you get the best deal. However, many people worry about the impact this practice might have on their credit scores. In this blog, we will delve into the intricacies of rate shopping, the types of credit inquiries, and how to minimize any negative effects on your credit score.

What Is Rate Shopping?

Rate shopping is the process of comparing interest rates, fees, and other terms from various lenders and credit card issuers. The goal is to secure the most favorable terms for your loan or credit card. By doing so, you can potentially save a significant amount of money over the life of the loan or credit card account. However, if not done carefully, rate shopping can temporarily lower your credit scores. Understanding the relationship between rate shopping, credit scoring, and credit inquiries can help you navigate this process with minimal impact on your credit score.

What Is an Inquiry?

In the context of your credit, an inquiry is a credit check performed by a lender to evaluate your creditworthiness. When a lender reviews your credit report or seeks a credit score based on that report, that request appears on your credit reports as an inquiry. There are two types of inquiries: hard and soft, each with different consequences for your credit scores.

Hard Inquiry

A hard inquiry can trigger a small, temporary reduction in your credit scores. It occurs after you’ve applied for credit, when a lender is deciding whether to issue you a loan or credit card and determining the terms, such as the amount to lend and the interest rate to charge. Credit scoring systems like the FICO® Score and VantageScore® may lower your scores by a few points when you receive a new hard inquiry because new debt is statistically associated with a higher risk of missed payments. Your scores typically recover within a few months if you maintain timely bill payments. However, multiple hard inquiries for different types of credit in quick succession can have a cumulative negative effect on your credit scores.

Soft Inquiry

A soft inquiry has no effect on your credit scores. It occurs when a lender or other authorized entity checks your credit report for informational purposes not directly related to an official credit application. Examples include card issuers checking your credit before sending you a promotional offer and you checking your own credit report.

Does Rate Shopping Hurt Your Credit?

To accommodate rate shopping for installment loans such as mortgages, auto loans, and student loans, FICO and VantageScore treat hard inquiries related to loan applications submitted within a narrow time frame as a single event. With current versions of the FICO® Score, the time window is a 45-day period; some older versions of the FICO® Score that are still used by lenders have a 14-day window. VantageScore uses a rolling two-week window: If you submit a series of applications for loans in the same amount and less than two weeks separates each application date, VantageScore will treat credit checks related to them as a single inquiry.

Credit scoring systems do not treat inquiries related to credit card applications as a single event. However, you can still rate-shop for credit cards without incurring multiple hard inquiries. To do so, use the prequalification option available from many card issuers. Prequalification typically takes only a few minutes and provides an estimate of the borrowing limit and interest rate the lender would give you if you formally apply for a card. Prequalification does not cause a hard inquiry and will not affect your credit scores. While prequalification doesn’t guarantee credit terms, it can give you a good idea of the interest rates and borrowing limits you can expect.

To get a firm offer of credit card terms, you must submit a full application, which typically requires more information than prequalification and also triggers a hard inquiry. A good approach is to apply for the card with the prequalification terms you like best. If you like the final terms you get after applying, accept the offer and your credit scores will only see a temporary ding from one hard inquiry. If you’d like to try for better terms, you can apply elsewhere, but keep in mind that doing so will prompt another hard inquiry.

The Bottom Line

Rate shopping is a smart practice that, when done carefully, has only a minor temporary impact on your credit scores. When shopping for installment loans, submitting all your applications within a 14-day timespan can prevent multiple hard inquiries from hurting your credit scores, no matter what credit scoring system or version may be used to check your credit. When shopping for credit cards, getting estimates on interest rates and fees via prequalification is a good strategy, and tools such as Experian’s free card comparison feature, which pairs you with credit cards based on your credit profile, can save you time.

At O1ne Mortgage, we understand the importance of securing the best possible terms for your loans and credit cards. Our team of experts is here to help you navigate the rate shopping process with ease. Call us today at 213-732-3074 for any mortgage service needs. We are committed to providing you with the best possible service and ensuring that you get the most favorable terms for your financial needs.