Does Applying for a Loan Hurt Your Credit?
Understand how loan applications affect your credit score and discover practical ways to manage their impact on your financial health.
Credit refers to an individual’s history of borrowing and repaying debt, which lenders use to assess financial reliability. Establishing a strong credit history is important for accessing financial products and securing favorable terms, such as lower interest rates on loans. This financial record, compiled into credit reports by national credit bureaus, influences various aspects of life, from loan approvals to housing and some job opportunities.
Understanding Credit Inquiries
When you apply for a loan or other forms of credit, a formal request for your credit information is made, resulting in a credit inquiry. There are two primary types: hard inquiries and soft inquiries. Understanding the distinction between these is important because only one type typically impacts your credit score.
A hard inquiry, also called a “hard pull,” occurs when a lender checks your credit report as part of a loan, credit card, or other credit application. This type of inquiry indicates you are actively seeking new credit, and it appears on your credit report for up to two years. Examples include applying for a mortgage, an auto loan, a student loan, or a new credit card. Lenders typically require your written consent to perform a hard inquiry.
A soft inquiry, or “soft pull,” happens when your credit report is accessed for informational purposes, not directly tied to a new credit application. These inquiries occur when you check your own credit score or report, or when lenders pre-approve you for offers. Soft inquiries do not affect your credit score and are usually only visible to you on your credit report. Employers or landlords might also perform soft checks as part of a background review, often with your permission.
How Loan Applications Affect Your Credit Score
Loan applications influence your credit score primarily through hard inquiries. When a lender performs a hard inquiry, it signals that you are seeking new debt, which can slightly and temporarily lower your credit score. For most individuals, a single hard inquiry might result in a decrease of fewer than five points on their FICO® Score. While a hard inquiry remains on your credit report for up to two years, its effect on your credit score typically diminishes after a few months and generally only impacts your score for about one year.
The “new credit” category, which includes recent inquiries and newly opened accounts, constitutes about 10% of a FICO® Score. Opening new accounts can also reduce the average age of your overall credit history, which is another factor in credit scoring models. However, the impact of inquiries is generally minor compared to more significant factors such as payment history, which accounts for 35% of a FICO® Score, and credit utilization, making up 30%. Maintaining consistent on-time payments and keeping credit card balances low are far more influential on your score.
Credit scoring models, like FICO® and VantageScore®, recognize that consumers often “rate shop” for the best loan terms. To accommodate this, they treat multiple inquiries for the same type of loan within a specific timeframe as a single inquiry. For FICO® Scores, this “shopping window” typically ranges from 14 to 45 days for mortgage, auto, and student loans, depending on the specific model used. VantageScore models generally consolidate inquiries for similar loans made within a 14-day rolling window into a single event. This allows you to compare offers from various lenders without each inquiry negatively affecting your score, provided they fall within the specified period and are for the same loan type.
Strategies to Manage Credit Impact
Managing the potential credit impact of loan applications involves several proactive steps. One effective strategy is to engage in “rate shopping” within a concentrated period. When applying for installment loans like mortgages, auto loans, or student loans, credit scoring models are designed to recognize that you are seeking the best terms for a single loan. By submitting all your loan applications for the same type of credit within a window of approximately 14 to 45 days, multiple hard inquiries can be treated as a single event, minimizing their collective impact on your score.
Before applying for any loan, it is advisable to check your own credit report and score. This allows you to understand your current credit standing, identify any potential errors or inaccuracies, and address them before a lender sees your report. You can obtain free copies of your credit reports from each of the three major credit bureaus—Experian, Equifax, and TransUnion—annually.
Applying only when genuinely necessary and for credit you are likely to be approved for can help prevent an accumulation of inquiries that could signal higher risk to lenders. While a single inquiry has minimal impact, a rapid succession of inquiries outside of the rate-shopping windows for different types of credit can have a compounding negative effect.
Maintaining strong credit habits consistently is important for overall credit health. This includes making all payments on time, as payment history is the largest component of your credit score. Keeping your credit utilization low, ideally below 30% of your available credit, demonstrates responsible credit management. These fundamental practices contribute far more to a healthy credit score than the temporary effects of loan application inquiries.