Is there ever a right or wrong time to refinance a car loan? Whether you opt for a new or used vehicle, buying a car can be an expensive endeavor. It’s no surprise, then, that the vast majority of cars on the road today are financed with the help…
Luckily, there are times where multiple credit inquiries will combine to count as only one.
Credit inquiries can dock your score by multiple points, but they’re a necessary evil if you’re trying to open a new line of credit.
Any time you apply for a new credit-based product, such as an auto loan, credit card, or mortgage, the lender will pull a copy of your credit report. This pull, or hard inquiry, has the potential to impact your credit score, especially if you accumulate too many of them in a short period of time.
That’s why it’s important to limit the number of credit inquiries that you initiate and new accounts for which you apply. Because of this, those searching for the best possible rate for a particular loan may be deterred from shopping around.
However, credit scoring models like FICO and VantageScore make it easy to shop for the best possible rate while still preserving your score. This is because they allow multiple inquiries to combine to count as one.
So, when and why does this happen? And if you want to take advantage of this credit calculation feature, what are the requirements? Will multiple credit inquiries hurt my score?
All About Credit Inquiries
Every time you apply for a new credit card, shop around for mortgage rates, or refinance your auto loan, you’ll encounter a credit inquiry. This inquiry is notated on your credit report any time a lender conducts a hard pull credit check, and shows that you are applying for lines of credit.
The number of credit inquiries you acquire in a given year makes up approximately 10 percent of your FICO credit score — the most popular (and arguably the most intuitive) credit scoring model around.
However, rack up too many and you could easily lose tens of points from an otherwise-great score. While inquiries will stay on your credit report for two years, they are only factored into your credit score calculation for 12 months.
This means that inquiries are far from the most impactful factor in the calculation.
The inquiry will still show up after the first year passes, but won’t “count” toward your score for the second year. After year two, it will fall off your credit report entirely. When you’re shopping for credit, however, things are a little different. We’ll get to that in a bit.
Permission for Inquiries
Hard pulls can only be conducted with your authorization. If you don’t give a lender permission to request your consumer history and credit report, they are not allowed to take your information and do so.
However, lenders will almost always require this authorization before they will approve you for credit-based products or extend you a line of credit. So, there’s not really a way around getting dinged for an inquiry if you’re trying to open a new account.
Also, keep in mind that if you’ve given a lender permission to pull your credit, you might have also given them permission to conduct a hard inquiry in the future. Be sure to read the fine print; if you are late paying your bill down the line, request a credit limit increase, or want to change the nature of your account with that company, they may initiate an unexpected hard pull.
Why You Want to Avoid Too Many Inquiries
Hard inquiries are a necessary evil if you are trying to open a new account with a lender of some kind. But they can also raise red flags if you rack up too many in a short period of time. The average consumer is “expected” to acquire one or two hard inquiries a year.
Depending on your existing credit history, these might drop your score by a handful of points or not even have a noticeable impact. However, apply for additional accounts in a 12-month period, and you’ll begin to feel the pinch.
Accumulating too many inquiries over the course of a year can signal to lenders that your financial situation is unstable… even if that’s not really the case. They could assume that you’re trying to use lines of credit to stay afloat. Or, they might believe that an influx of new accounts (and subsequent monthly payments) could hinder your ability to stay on top of your finances.
Plus, keep in mind that every inquiry has the potential to drop your score. Depending on the length of your credit history and the number of accounts you carry in good standing, each inquiry could mean score points dropped.
Did you actually follow through with opening new accounts following each of those inquiries? Then your score will also drop in term of your average age of accounts (AAoA).
Rate Shopping: When Multiple Inquiries Count As One
Borrowers can sometimes get pre-qualified offers from lenders, which include an estimated interest rate based on a soft inquiry. Without submitting your information and allowing a lender to run a credit check, however, they typically can’t offer you a guaranteed interest rate.
So, what if a lender pulls your credit (resulting in a hard inquiry) only to offer you a much higher rate than you’re willing to accept?
Rate shopping is perfect for consumers who plan to do as the name suggests, and shop around for the lowest interest rates through different lenders. This is helpful if you’re trying to get a home mortgage, auto loan, or even a student loan and want to find the best terms available.
The “Rules” of Rate Shopping
So, how does rate shopping actually work, and what can you expect to see on your credit report? Here are five important rules to remember.
Rule 1: Your current rate shopping period is limited to 30 days.
If you want to shop around for interest rates, you should only start the process when you’re actually ready to open an account. The reason? You’re only protected by the FICO rate shopping period for a specified amount of time.
When a lender pulls your credit report, the score they receive will not factor in any related inquiries from the last 30 days. If you’re rate shopping your third mortgage lender this month, they will see a score that doesn’t factor in the other two mortgage applications. As long as it’s the same type of application activity and all within the last 30 days, your score is protected.
As long as it’s the same type of application activity and all within the last 30 days, your score is protected.
However, this doesn’t apply to other credit product applications. If you’re shopping for a mortgage lender, for instance, the FICO score they receive will factor in that new credit card application you submitted last week.
Rule 2: Your past rate shopping periods range from 14-45 days.
According to FICO, there are three different rate shopping periods that your past inquiries can fall under. They are 45 days, 30 days, and 14 days; these time frames will count for inquiries not made in the last month, but were still from a time when you were rate shopping. The time period that applies to your score depends on the scoring model your lender uses when they pull your credit.
Lenders choose which scoring model they use when pulling your credit; there’s many different types of scoring models, and they all differ in their rate shopping period calculations. Unless you know which model your lender prefers, you have no way of knowing beforehand which rate shopping period you’ll be allotted.
Rule 3: Some account types aren’t included.
As we touched on above, rate shopping only applies to certain credit products. Things like credit cards and retail accounts are not included, but mortgages, auto loans, and student loans certainly are.
Rule 4: You’ll still see the inquiries on your report, even if you were rate shopping.
After shopping rates, you might be surprised to see each and every one of those inquiries show up on your credit report. It fact, federal law requires them to all be listed, regardless of whether they’re part of a rate shopping period or if you even opened the account.
The rate shopping rule still applies to your credit score, though, even though they’re all listed individually. When the information from your report is used to calculate your credit score, it will count all of those qualifying inquiries as one, saving your score in the process.
Rule 5: VantageScore has other rules.
FICO scoring models are used by lenders more often than any other type, but that doesn’t mean your lender has to use FICO. They could request a VantageScore, the second-most-common option. And if they do, the rules are different.
VantageScore does allow for rate shopping in its score calculations. However, this is only offered in a rolling two-week window.
Shop Rates the Smart Way
If you will need an auto loan/refi, home mortgage, or student loan in the next year, rate shopping should be on your radar. It will allow you to find the best possible terms for your line of credit, without destroying your credit score in the process.
However, since you probably don’t know which scoring model(s) your future potential lenders will use, it’s better to prepare for the worst-case scenario. Gather all of your information and try to complete all applications in a 14-day period. That way, your score is always protected, whether the lender pulls a FICO 8 or a VantageScore 3.0 report… or anything in between.