You've Been Warned: Shopping For Loans Could Hurt Your Credit Score

The pursuit of a great credit score can occupy a lot of bandwidth in the average consumer's mind, but it doesn't need to. In reality, lenders use dozens of scoring models to make decisions about a borrower's creditworthiness, not just the singular FICO score average consumers see for themselves. Then, there's the constant shifts that can take place in your score. All manner of behaviors, both good and bad, can lower or raise your credit score in small ways on a regular basis. And while the credit-scoring process might be a little too complicated to fully understand, it's easy to see that loan shopping can cause your score to drop unnecessarily.

That might be a tough pill to swallow, since shopping around for loans can be both practical and beneficial. Whether you're in the market for a new rewards credit card, seeking a reasonable mortgage to buy your first home, or looking for a new car, it's always a good idea to price out a few options. The difference can be a percentage point or more in the interest rate, which can save you thousands of dollars over the long term on something like a mortgage. But you'll need to be smart with your exploration. Generally, if you apply for multiple loans over a long period of time, the impact will result in a negative score movement. But there are ways around this issue.

Realistically, hard credit pulls only drop your score by a few points but checking your own credit score through your bank or credit card app acts as a "soft pull" with no impact on your credit. Hard pulls remain as a notched inquiry for up to two years, but numerous loan applications within a 14-day window are typically counted as one inquiry event. The most recent FICO scoring models extend this window out to 45 days, giving borrowers even more room to maneuver.

It's worth keeping in mind that FICO and VantageScore models deal with this process, known as deduplicating, differently. For example, if you applied for a home and student loan in the same period of time, FICO would consider that two inquiries while VantageScore would consider it one. Similarly, FICO models don't count hard inquiries from auto, home, and student loans that have occurred within the past 30 days. So, even if you can't make a series of applications all at once, you have a small window before the negative impact takes effect.

Getting all your ducks in a row when shopping for financial products is your best bet. Then, you can apply for a range of lending products quickly and pick the best offer.