Ask Money

Go ahead: Shop for the best loan

Chris Farrell Sep 19, 2011

Question: I was recently pre-approved for a mortgage loan, but was outbid on the home. I then applied to three companies to get comparative quotes for refinancing my auto loan, since interest rates have dipped since I bought my car.

I have very good credit–over 800 in one report. Will this recent activity bring my credit down, and if so, why? It’s not indicative of debt, and in fact I have no debt except a $9000 car loan. If it does impact my score, how long will it take for my score to recover?
Thanks. Coleen, Montpelier, VT

Answer: The credit inquiries shouldn’t impact your score much, if at all. The credit scoring companies realize that people should and do comparison shop for the best rate when they’re making a major purchase, such as mortgage, auto and student loans.

“For these types of loans, the FICO score ignores inquiries made in the 30 days prior to scoring,” according to FICO, the leading competitor in the credit scoring industry. “So, if you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping.”

Here’s how Experian–a credit reporting bureau and the creator of its own credit scoring system–puts it: “Too many inquiries may have a negative impact on your credit score. However, most recently developed credit scores recognize when a consumer is shopping for the best rates and either ignore multiple inquiries or count them as only one inquiry if they occur within a specific period of time. In such cases, shopping around will have little or no impact on a credit score.”

You can read more about how FICO takes loan comparison shopping into account here and here.

So, the credit scoring procedure protects you with the auto loan inquiries. However, the combination of a pre-approved mortgage and shopping for an auto loan could ding your credit score. But if it did the impact would be minimal.

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