In some cases, an excessive number of credit inquiries on one's credit report in a short amount of time can adversely affect their credit score. While this is partially true, the magnitude of the problem is often exaggerated. Many factors are at play when determining your credit score, and credit inquiries are a relatively small part of them. A large drop in your credit score is unlikely if you are shopping for rates on your car or student loans or mortgage. Be sure, however, to keep the following things in mind:
Applying for credit leads to inquiries into your credit report by lenders.
Every time you apply for credit, whether it be for a credit card or a loan, the lender has the authority to see a copy of your credit report to determine how much risk you will be if they offer you credit. Potential landlords and employers also can make inquiries into your credit.
These inquiries will be listed on your credit report.
Each time a lender makes an inquiry, the inquiry will be put on your credit report. While other businesses can make inquiries about your credit score, only the inquiries that result from you asking for a line of credit will affect your credit score.
Multiple credit inquiries over a short period can send a signal to creditors that you may be a risk.
Since individuals with six or more inquiries on their report are eight times more likely to declare bankruptcy than those with no inquiries, lenders may see numerous credit inquiries as an indication that you are a possible risk.
Each inquiry has only a small effect.
While the total effect of an inquiry varies depending on your personal credit history, one inquiry on your report only amounts to less than a five point reduction in your credit score, which ranges from 300-850.
The type of inquiry also determines the magnitude of the effect on your credit score.
Creditors and credit bureaus recognize that many individuals "rate shop" when looking for a certain loan or mortgage. In other words, they go to several different lenders to assess their rates in comparison to others. This process may trigger several inquiries, but as rate shopping is seen as a good thing, it will have a different impact on your credit score than if you had applied for, say, five different credit cards.
If done correctly, rate shopping will not negatively impact your credit score.
Credit bureaus ignore multiple inquiries made in 30 days before scoring, so long as they are for an auto, student or home loan. The bureaus will also look for similar inquiries before the 30 day period, and count all of them as only one inquiry as long as they fall within the "shopping period." Older credit calculations had a shopping period of 14 days; the new formula has a shopping period of 45 days. It is up to the lender to determine which formula they want the credit bureau to use when calculating your score.
In sum, while certain types of frequent inquiries can drop your score, such as applications for credit cards, others do not have the same effect if the "rate shopping" process is conducted properly. To protect your report and score, limit your rate shopping to the 30-day period before you choose which lender to use. This way, you can find the best rate while keeping your score intact.