If youre in the market for a new mortgage, car loan or credit card, youll need to shop around to find the best interest rates.
But to find out exactly what you qualify for, the lender will need to pull your credit report. This is called a credit inquiry
. When a lender inquires about your credit, he contacts the reporting bureaus and requests a copy of your credit report. No big deal.
Or is it? There can indeed be a drawback to this process. Every time your credit report is pinged, there could be consequences
for your FICO score
. Depending on when and how often you apply for new credit, this valued credit score could lose points. Or, even worse, the lender could perceive you as a bad risk.
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Good News: We Are All One
Credit reporting agencies understand that shopping around requires you to apply for credit with multiple lenders.
Therefore, if multiple lenders of the same type pull your report within a 30-day window, the inquiries are counted as one.
Thats the good news. If five mortgage lenders pull your credit report during a 30-day period, it will be treated as a single inquiry because they all pertain to mortgages. This special treatment will spare your FICO score any serious dings.
Bad News: We Are All Different
The other side of the coin is that when several lenders of different types pull your credit score, theyll be treated as multiple inquiries. Each of those inquiries could potentially cost you at least five points
off your FICO score.
If you apply for loans for a car and a home within a 30-day time frame, for example, theyll be treated as two separate inquires. This could potentially ding your FICO score a total of 10 points, and make you seem bad risky.
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The Solution: Planning
If youre preparing for a mortgage application and want to enhance your credit profile, you may decide to shore up your FICO score by getting different types of credit lines.
This could be a smart move if you dont have enough credit to qualify for a loan; but its not so smart if you try to do it all at once.
Yes, you want to have at least one line of credit thats revolving, and another thats installment in order to show that youre a good, debt-paying consumer. But if you apply for all of those lines at once,
youll definitely hurt your score.
Instead, plan everything out.
It might be better to get that car loan one month, then wait six months to get the unsecured credit card. Then wait another six months or more to apply for your mortgage. To avoid dinging your FICO score when applying for new credit, shop around in a 30-day timeframe,
and carefully plan all new inquiries.