How to Rate Shop and Minimize the Impact to Your FICO® Scores

Photo by RDNE Stock Project on Pexels

Before a major purchase, like a house or a car, it's smart to shop around and compare houses and cars to make sure you get a good deal. Yet comparing loan offers from multiple lenders could be just as important during the home or car-buying process since the interest rates and fees a lender charges can also have a big impact on your overall financial picture.

Of course, finding the loan option that works best for your budget often involves letting several lenders check your credit report. And you might be worried that multiple credit inquiries could have a negative impact on your FICO® Score.

Yet if you approach the process thoughtfully, it's often possible to rate shop and minimize the impact to your FICO® Score. Here's how hard inquiries can impact your FICO Score, and how to protect yourself when comparing loan offers from several lenders in a short period of time.

Why Rate Shopping Matters

Comparing loan offers from different lenders is important because doing so could save you money. According to Freddie Mac, mortgage borrowers in the second half of 2022 who received as many as five rate quotes could possibly save over $6,000 (assuming the loan stayed active for five years or more).

In addition to (hopefully) finding the best interest rate available, you can also compare other loan terms and details before you commit to a new loan. It's wise to pay attention to any fees a lender charges, repayment terms, monthly payment amount, customer service reputation, and more as you shop around for the best financing option for your situation.

As a consumer, you don't have the ability to control the interest rates and fees that a lender charges (or other aspects of a loan). But you do have total control over the lender you choose to trust with your business.

How Credit Inquiries Impact Your FICO® Score

When you apply for credit, a lender may request a copy of your credit report from one or more of the credit bureaus—Equifax, TransUnion, or Experian. This request is known as a credit inquiry.

Hard credit inquiries, like the type that take place when you seek credit from a lender, may have the potential to impact your FICO® Score in a negative way. Research shows that opening several new credit accounts in a short period of time is indicative of a higher level of credit risk. (Note: Checking your own credit report is a “soft” credit inquiry and will never harm your FICO Score.)

However, hard inquiries typically only have a small impact on your FICO® Score. New credit makes up 10% of your FICO Score, and hard inquiries only influence a portion of those points. Furthermore, although hard inquiries can stay on your credit report for up to 24 months, FICO Scores only consider them for 12 months.

A hard inquiry doesn't cause you to lose a set number of points from your FICO® Score. Yet for most people, one additional hard credit inquiry results in the loss of less than five points from their FICO Score.

Which Credit Inquiries Are Eligible for Special Rate Shopping Treatment?

Research shows that FICO® Scores are more predictive when they score the following types of credit inquiries in a different way because they commonly involve rate shopping behavior.

Mortgage
Auto Loan
Student Loan

For example, if a credit report shows multiple credit inquiries from mortgage companies in a short time frame, the odds are high that the consumer was shopping around for the best deal on a home loan. By comparison, if a credit report shows several consecutive credit card applications, the consumer might be seeking multiple new lines of credit.

There are two ways that FICO® Scores apply special rate-shopping treatment to mortgage, auto loan, and student loan credit inquiries that appear on consumer credit reports:

Ignore: Ignore rate-shopping inquiries that are under 30 days old.
Deduping: count multiple rate-shopping inquiries as a single inquiry if they fall within the scoring model's “rate shopping window.”

How Long Is the Rate-Shopping Window?

Older versions of the FICO® Score allow a 14-day span for rate shopping. So, if you apply for multiple auto loans within a two-week period and a future lender requests your FICO Score using an older version of the scoring model, you should be fine. Even if several auto-loan-related credit inquiries show up on your credit report, the scoring model should treat them as one inquiry for score calculation purposes.

With newer versions of the FICO® Score, the rate-shopping window expands to 45-days. This allows consumers a little more wiggle room to compare interest rates and other loan terms from multiple lenders.

However, it's important to remember that some lenders still use older versions of the FICO® Score. That means it's a good idea to keep your rate-shopping practices to a short time frame whenever possible to operate on the safe side.

Bottom Line

Rate shopping is an important part of preparing your finances for a new mortgage, auto, or student loan. Not only does comparing offers from multiple lenders have the potential to help you save money, this good practice also gives you an opportunity to review your budget and make sure you don't overextend yourself financially before you take on new debt.

Remember, it's also a good idea to review your own credit reports before you apply for a new loan. Reviewing your credit gives you the chance to check for credit errors or fraud, and you never have to worry about these types of soft credit inquiries harming your FICO® Score.

Get your FICO® Score from FICO, for free. No credit card required.

Michelle Black

Michelle Black, Founder of CreditWriter.com is a leading credit expert, financial writer, and speaker with nearly two decades of experience. Her work has been featured with major outlets such as Forbes, Reader's Digest, and U.S. News and World Report.