Credit score affected by shopping for loans

Your credit score can drop slightly, depending on what you do

Most consumers are aware of something known as a FICO score or credit score , a three-digit number that represents the consumer’s worth to anyone lending money. That score, created by industry giant Fair, Isaac and Company, distills every aspect of a borrower’s credit history - loans, judgments, bankruptcies, credit cards into a single number that can assess the likelihood that a loan will be repaid when granted. The score ranges from 300 to 850; the medial is in the 700 range. What many people fail to realize is that the score is not only affected by granted credit, but it is also affected when the consumer applies for credit.

The theory behind having an application for credit affect the score is that many consumers owe too much money on credit cards. In fact, many consumers owe more money on credit cards than they can afford to repay. This has led to numerous reforms throughout the lending industry, as well as reforms in bankruptcy law. According to the credit bureaus, a number of attempts to borrow money or establish credit within a short period of time may represent an act of desperation on the part of a consumer. Their debts that they cannot repay may have inspired them to borrow more money by obtaining other loans. To offset this, the complex formulae used to determine the score keep track of how many attempts are made to secure credit in a short period of time.

Some people may worry about this. A decline in the score is never seen as a good thing, and on the surface, it seems like a penalty to have it reduced if all you are doing is trying to find the best rate on a loan. After all, each time you inquire with a lender about their rates, the lender will do a credit check, and an accumulation of such checks will lower the score, won’t it?

Apparently, this is a common problem, and the calculations done to determine the FICO figure take this into consideration. Any number of similar inquires regarding a mortgage or home equity line of credit, made within a two week period, are regarded as a single inquiry. In fact, any inquiries for auto loans or mortgages made within 30 days of compiling a credit score are ignored when tabulating the score. 

While applying for a number of different loans within a short period of time can negatively affect the borrower’s record, a number of inquiries regarding a mortgage will not. The system that Experian, Trans Union and Equifax use to determine whether or not a consumer is worthy of a loan is not perfect, it does take into account the sorts of things that are typically done by borrowers, such as shopping around for a mortgage. Anything unusual, such as applying for ten credit cards at once, will negatively affect the score.