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Understanding Rate Shopping and Its Impact on Your Credit

Rate shopping involves comparing interest rates and terms from various lenders before accepting a loan or credit card offer. This practice ensures you get the best possible terms on your credit. If done correctly, it will have only a minor impact on your credit scores. Here’s a detailed look at rate shopping and its effect on your credit scores.

What Is Rate Shopping?

Rate shopping is the process of comparing interest rates, fees, and other terms from different lenders and credit card issuers to secure the best deal. This can lead to significant savings over the life of a 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 how credit scoring systems handle credit checks (or inquiries) can help you shop for credit with minimal impact on your scores.

What Is an Inquiry?

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, the 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 cause 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 amount to lend and the interest and fees 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, as 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 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 by using 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 offer 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, regardless of the credit scoring system or version 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.

For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. We are here to help you find the best mortgage options available.

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