The Borrowing Guide that WORKS: Beat the credit check

This article is about exactly how applications for credit affect your credit rating. This includes:

The answers to each of these questions can totally change how you think about applying for credit and result in faster, higher quality loan offers.

It’s a common idiom that applying for multiple loans hurts your credit score. If you’re in the market for a personal loan of *any* type, someone’s given you the same piece of advice. “Watch out, don’t apply for too many loans, just applying will hurt your credit rating.” Since our borrowing strategy is hinged on the ability to make several loan applications and “shop around”, this would seem to be a nail directly in our proverbial coffin, right? Not exactly.

Here’s what you need to know about credit inquiries and your credit rating:

What is an Inquiry?

An inquiry is a request made to a credit bureau for a copy of your credit history. There are actually two types of inquiries, soft and hard. A “soft” inquiry is made when you are not seeking credit, but as part of a background check. These can be made by employers, agencies, or even you! Soft inquiries have no effect on credit score. Then there are “hard” inquiries… these are made by lending institutions when you are applying for credit and may have a small effect on credit score.

Hard inquiries and your credit score

Unfortunately, when opening several credit accounts within a short period of time, there will be a decrease in your credit score. Fortunately, applications for home, auto, and student loans are handled completely differently. Applying to several different lending institutions within a short period of time for the same type of financing will not reduce credit *at all* during this period. After this period a small change may occur.

How much do hard inquiries affect my credit?

For a single hard inquiry, the affect on your credit can be either zero, or very small. Under normal circumstances, an individual wants to obtain a single form of credit, like a home loan or a credit card. Decreases in credit for these items will be marginal or zero. If you’re applying for several different credit cards within a short period, you will probably notice a drop in your credit rating.

Rate shopping and your credit score

Despite only looking for one loan, multiple inquiries will be made to your credit report if you shop around at several banks for one home, student, or auto loan. Since rate shopping does not correspond to increased credit risk, these inquiries are bundled together. Multiple hard inquiries within a 14-45 day period for the same type of loan do not affect your credit rating… at all during the grace period. After that period is up, just one inquiry will appear on your credit rating, no matter how many rates you compared.

Use credit scoring to your advantage

Here’s a quick summary of what we’ve learned:

Inquiries are requests to view your credit history. Hard inquiries are made by lenders on your behalf, and affect credit slightly. Soft inquiries have no effect on credit and can be made in background checks or by you, to learn your own credit score.
Hard inquiries made for different forms of credit, such as numerous different loans, or several credit cards will hurt your credit score and may take effect immediately.
Hard inquiries made for the same type of loan in a 14-45 day grace period will not appear on your credit score until the end of the period, and their effect is very small or zero.

Taking advantage: Strategy for home, auto, and student loans

To capitalize on the credit scoring system, you should plan to rate shop only during your grace period. It’s difficult to know how long the period will be for the banks at which you are applying, so it’s safest to assume 14 days. During this time frame, apply to several lenders for the same type of loan. Let’s say at least 5 lenders. Here’s how to determine which ones:

Use our directory to search for a traditional bank in your area
The results will be sorted in order of the bank’s rating by other people who have borrowed from them. The most gold stars, the better the experience that previous customers have had. We recommend you choose the 5 highest rated banks nearest to you.
Note these lender’s contact details, and schedule appointments with each to apply for the same type of loan for a similar amount of money.
Ensure that the appointments you schedule fall within the same 14 day period, otherwise your credit score may decrease slightly and the loans offered to you will be slightly less desirable.
Choose the best loan, and come back here to review your experience with your lender!