How Does Shopping Around Impact Your Credit Score?

A credit score is a numerical representation of an individual’s creditworthiness, influencing lender decisions on loans, credit cards, and rental applications, and often determining interest rates. Understanding how seeking new credit impacts this score is important for financial health.

Credit Inquiries and Your Score

Applying for new credit often leads to a credit inquiry on your report. These inquiries are either hard or soft, with different effects on your credit score.

A hard inquiry occurs when a financial institution formally checks your credit report for a new credit application, like a loan or credit card. This signals to lenders you are seeking additional credit, which can be viewed as increased risk. A single hard inquiry usually causes a small, temporary dip in your score, typically by a few points.

Inquiries remain on your report for up to two years, though their impact lessens after 12 months. Multiple hard inquiries in a short period, especially for different credit types, can signal higher risk and lead to a more noticeable score reduction.

A soft inquiry occurs when your credit report is accessed for informational purposes, not for a new credit application. Examples include checking your own credit score, pre-approved credit offers, or employer background checks. Soft inquiries do not impact your credit score, as they do not indicate new debt. While they may appear on your credit report, only you can typically view them, and they do not affect a lender’s assessment.

The Impact of Opening New Credit Accounts

Opening new credit accounts influences your credit score beyond the initial inquiry. Credit scoring models evaluate these effects as part of your credit profile.

Average Age of Accounts

The average age of your credit accounts is a significant factor. Opening a new account lowers the overall average age of your existing credit lines. Credit scoring models favor a longer, established credit history, demonstrating consistent debt management. A shorter average age can negatively influence your score, especially with limited older accounts.

Credit Mix

Your credit mix, or the different types of credit accounts you possess, also plays a role. Adding a new credit type, such as an installment loan to a history of revolving credit, can diversify your portfolio. A healthy mix of installment and revolving credit is viewed favorably by scoring models, suggesting broader debt management experience.

New Credit Factor

Credit scoring models consider the amount of new credit recently acquired, known as the “new credit” factor. Opening multiple new accounts within a short timeframe can be perceived as higher risk by lenders. This behavior may suggest increased financial need or overextension, potentially decreasing your credit score. This factor accounts for a portion of your overall score, emphasizing judicious management of new credit applications.

Special Rules for Rate Shopping

Consumers often “rate shop” to compare terms for significant loans like mortgages, auto loans, and student loans. Understanding how credit scoring models handle multiple inquiries during this process is important.

Credit scoring models, such as FICO and VantageScore, incorporate specific rules for rate shopping. They recognize consumers seek a single loan and should not be penalized for comparing offers. Therefore, multiple hard inquiries for the same type of loan within a concentrated timeframe are often treated as a single inquiry for scoring purposes. This timeframe varies by model, typically ranging from 14 to 45 days.

This special rule primarily applies to installment loans, as individuals typically take out only one mortgage, auto, or student loan at a time. This allows consumers to seek favorable terms without significantly harming their credit score. This exception does not extend to revolving credit applications, such as credit cards. Each credit card application typically results in a separate hard inquiry that can individually affect your score.