Every person who needs extra money to purchase a new car or home will probably want to compare interest rates and apply for a few loans. Choosing the most suitable lending option isn’t the easiest task and it certainly requires some time and effort. Some people rate shopping to find the best deal with the lowest interest rates. Others are trying to find a lender who will approve their loan request even with a bad credit score. For students, learning how to lower the interest rate on student loans is crucial.
If you are shopping for the best deal on a personal loan, here is what you should know about the impact it may have on your credit score.
Hard Inquiries and What They Mean
Once you decide that you don’t have enough savings to finance an expensive purchase or cover any expenses, you apply for a loan. The lenders and finance-related service providers will perform so-called “hard” or “soft” inquiries once your loan request is submitted. This is a credit check that will tell the lender is you are a high-risk borrower. Some quick loans online can be given with a soft inquiry which won’t affect your credit score. However, many financial institutions conduct a hard inquiry which remains on the credit report of the borrower for two years and may affect their score.
Lenders prefer hard inquiries in case you are applying for a credit card, a mortgage or an auto loan. They want to know that it’s safe enough to lend you the money. Pay attention that a hard inquiry may lower your credit score by one to several points. While a single hard inquiry is not that dangerous, you need to be careful with multiple loan requests. If you are applying to several credit cards within a short time period, you will undergo through several hard inquiries which may turn you into a high-risk borrower.
When You Can Have a Hard Inquiry
In most cases, you will have to undergo through the process of hard inquiry if you are willing to increase your credit card limit or apply for a loan. Prospective lenders will want to look through the credit history of the borrower and see if they can manage to make new monthly payments. In other words, your credit score may be affected because of hard inquiry when you:
- Apply for a business loan. If you are a business owner, you may notice hard inquiry on your credit report in case you were applying for a business loan through an SBA (Small Business Administration).
- Apply for a personal loan or a credit card. Your personal credit report may also contain hard inquiries if you’ve applied for a mortgage, car loan, small personal loan or a student loan. This happens because banks and lending institutions want to review the credit history of the borrower and see their creditworthiness.
- Ask for an increase of your credit limit. This process is similar to taking a new credit card so the provider will also conduct a hard inquiry to check your credit history before they make the final decision whether it will be suitable for you to manage a higher credit limit.
- Apply for various services. In order to define whether you will be able to afford another regular payment (such as for a new phone contract, TV or other utilities) a hard inquiry will be performed as well.
How Can Hard Inquiry Affect Your Credit?
Generally, a hard inquiry will remain on the credit report of the borrower for two years but it may affect their credit for only one year. Is there a chance to minimize this influence? Yes, you need to search for the best deal on a loan within 30 to 45 days. Another way is to turn to the finance-related service providers who perform only soft credit checks.
If you are planning to purchase a home or a new car, you don’t need to worry about multiple hard credit inquiries. There is a time frame for up to 45 days when you can safely go rate shopping in order to find the best loan terms and the lowest interest rate. FICO allows borrowers to use this period of time without having to worry about their credit score. This time is usually enough to find the most suitable lending solution.
All in all, the credit score of the borrower plays an important role in their financial life and lending decisions. Hard inquiries are conducted by lenders when you apply for a mortgage, a student loan, a car loan, a credit card or a small personal loan. If you want to minimize the impact of hard inquiries on your credit, it pays to boost your credit score first. When you have good credit, you will be offered more lending options with better terms and rates.
Published by David Fortune