If you keep a close eye on your credit score, you might notice that it drops shortly after you apply for a new credit card or loan. We’ll break down the reasons for the dip, and explain how your score changes in different scenarios.
What does a loan application have to do with my FICO score?
Lenders use your credit score to decide whether they can trust you to pay back a loan (or rent an apartment, or make payments on your phone bill, etc.) Doing things that can be considered risky, like carrying a high balance on your credit cards or missing your payments, will lower your score. So why would a new application be considered risky?
Well, from the lender’s perspective, asking for a new loan probably means you need cash, which might mean you can’t repay the loan. It may not be true – you might be taking out student loans that you’re confident you can repay, or you’re signing up for a credit card to get the miles – but they’re making their best guess on what a new application means for your creditworthiness. And by that logic, a new application means a slightly lower score.
The special cases
Typically, every new loan application lowers your score. For instance, applying for three credit cards in quick succession will ding your credit three times. However, on big loans like mortgages or student loans, you have a window of time (usually around 45 days) when you can apply for as many of those loans as you want with the same effect as applying for one. This is because lenders expect you to compare rates for those loans – when you’re going to be taking out hundreds of thousands of dollars, it pays to shop around – so they won’t punish you for being financially savvy.
When checking your score doesn’t lower it
Since applying for a loan lowers your score, you might think that it drops every time someone checks it. However, credit reporting agencies make a distinction between “hard inquiries,” which affect your score, and “soft inquiries,” which don’t.
Hard inquiries (or “hard pulls”) happen when you authorize someone else to check your score in the process of applying for something, like a credit card or personal loan. These are the ones that’ll ding your FICO score – typically around 5 points, according to MyFico.com. You should avoid incurring too many hard inquiries in a short timeframe.
Soft inquiries (“soft pulls”), on the other hand, don’t affect your credit score. These are inquiries that either you’re making in the process of checking your credit score, or that a lender is making without your knowledge in order to pre-approve you for a loan. The biggest takeaway here is that you shouldn’t worry about checking your credit score – you won’t see a dip because of it.
What about non-lenders that make inquiries, like cable TV providers or apartment landlords? It depends: Some make hard inquiries, and others soft. The best way to find out is to ask them directly. But be sure to check your own score early and often, to avoid unpleasant surprises.
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The post Why Does My Credit Score Drop When I Apply for a Loan? appeared first on NerdWallet Credit Card Blog.
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