How do FICO scores consider student loan shopping?
The growth of the student loan industry has increased public interest in how lenders assess the credit risk of young college-bound adults. Both large and small lenders often use FICO® credit scores to help them underwrite student loans. The following information is intended to help you understand how shopping for the best rate on a student loan may affect a person's FICO score.
The Basics
What is an "inquiry"?
When you apply for credit, you authorize those lenders to ask or "inquire" for a copy of your credit report from a credit bureau. When you later check your credit report, you may notice that their credit inquiries are listed. You may also see listed there inquiries by businesses that you don't know. But the only inquiries that count toward your FICO score are the ones that result from your applications for new credit.
Does shopping for a loan affect my FICO score?
Fair Isaac's research shows that opening several credit accounts in a short period of time represents greater credit risk. When the information on your credit report shows that you have been applying several times for credit in a short period of time, your FICO score can be lower as a result.
How much will rate shopping affect my score?
The impact from rate shopping will vary from person to person based on their unique credit histories. In general, credit inquiries have a small impact on one's FICO score. For most people, one additional credit inquiry will take less than five points off their FICO score. For perspective, the full range for FICO scores is 300-850®. Inquiries can have a greater impact if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk. Statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports. While inquiries often can play a part in assessing risk, they play a minor part. Much more important factors for your score are how timely you pay your bills and your overall debt burden as indicated on your credit report.
Does the formula treat all rate shopping inquiries the same?
No. Research has indicated that the FICO score is more predictive when it treats mortgage-related and auto loan-related inquiries in a different way. For these type of inquiries the FICO score ignores all inquiries made in the 30 days prior to scoring. So if you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping. In addition, the score looks on your credit report for rate shopping inquiries older than 30 days. If it finds some, it counts all those inquiries that fall in a typical shopping period as just one inquiry when determining your score. For FICO scores calculated from older versions of the scoring formula, this shopping period is any 14 day span. For FICO scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span. Each lender chooses which version of the FICO scoring formula it wants the credit reporting agency to use to calculate your FICO score.
Student Loan Shopping
What about shopping for a student loan – how does the FICO score treat that?
Currently, the treatment of student loan inquiries by the FICO credit scoring models depends on the manner in which those student loan inquiries are reported by lenders to each of the three bureaus. The FICO score is built using credit bureau data, so if the inquiries are reported by the lenders in a manner that indicates rate shopping, the FICO credit scoring model uses the same inquiry logic described above.
Why doesn't the credit scoring model treat student loan-related inquiries the same as mortgage-related inquiries and auto loan-related inquiries?
Because to date, the consumer credit data we use to update the FICO scoring formula hasn't included enough student loan-specific inquiries or accounts for our scientists to determine the predictive properties of student loan inquiries. Our scoring formula is based on the results from our statistical analysis of many, many sample credit records, so the scoring formula does the best job possible to assess risk from the data that is reported by lenders to credit bureaus.
Why doesn't Fair Isaac simply change the FICO formula now?
It's important to understand that the FICO score is based upon mathematics, not policies. By relying on statistical objectivity, the FICO scoring formula is a much better predictor of risk than was the subjective, judgmental processes lenders once had to rely on exclusively to estimate credit risk. Lenders' use of FICO scores has helped millions of people to qualify for credit – including student loans – who previously would have been declined or not even considered.
What's the best advice for people shopping for student loans so they protect their FICO scores?
Doing a little homework first is always a good idea no matter what type of credit you're seeking. When shopping for a student loan, we recommend that you do some research to compare two or more lenders. Then select a lender and apply for your loan to see if that lender can provide the loan you want – at the terms you want. This approach will result in the smallest number of credit inquiries and best possible outcome for your FICO score.
