Rate Shopping and Your Credit Score: Essential Information

Nothing strikes fear into the heart of debtors more than the words “hard inquiry”. It’s a score-reducing, report-damaging red flag that credit bureaus wave in front of lenders, potentially leading to higher interest rates, restricted choices, and outright rejections. The problem is, a hard inquiry is initiated during a loan or credit application and needs to happen before you’re given the sort of detailed information required to make an informed decision.

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It can feel like a Catch-22, but it’s something that credit scoring systems have considered and make allowances for in the form of rate shopping.

Rate shopping essentially allows you to initiate multiple hard inquiries without suffering the consequences, but there are exceptions that you need to be aware of.

If you’re shopping for an auto loan, home loan, student loan or credit card, make sure you read this guide first.

Rate Shopping and Your Credit Score

Research suggests that a borrower applying for multiple loans in a short space of time is a greater credit risk. It only makes sense—multiple applications indicate a certain degree of desperation and will raise red flags for any lender paying attention.

This is why some inquiries, known as hard inquiries, show on your credit report. They also acknowledge that not all inquiries warrant this level of concern, which is why soft inquiries exist. 

You might be surprised to learn that a hard inquiry provides the creditor with the same information as a soft inquiry and the only difference is the mark that it leaves on your report.

But what happens if you simply want the best possible deal? Many loan providers insist on running a detailed credit check before giving you a loan, which means you’ll be hit with multiple hard inquiries simply because you refuse to accept the first offer you receive.

This is where rate shopping comes in. Rate shopping combines all related inquiries into one, which means your credit score drops as if you were applying for a single loan or mortgage, as opposed to an individual application.

Rate Shopping Windows

Different credit scoring systems consider different date ranges for rate shopping. If you apply for the same loan within this window, then it shouldn’t count as an additional query. Any queries outside of this window, however, may further reduce your credit score:

  • FICO Rate Shopping (14 to 45 days): The FICO scoring system has experienced many changes over the years and lenders aren’t always consistent with regards to which score they use. Older versions of this score allow for a rate shopping window of just 14 days, which doesn’t give you much time at all. Newer ones increase this to 30 days, while the newest FICO scoring system allows for a full 45 days.
  • VantageScore Rate Shopping (14 days): VantageScore has also undergone several changes, with the latest being VantageScore 4.0. However, VantageScore 3.0 remains the most common and the rate shopping window on this scoring system is just 14 days.

To stay on the safe side, keep most of your inquiries within a 14-day period and the rest within a 30-day period. 

When Does Rate Shopping Apply?

Rate shopping applies for personal loans, student loans, auto loans, and mortgages. If you shop with one mortgage provider on day 1, another on day 5, and another on day 10, you should only receive 1 hard inquiry. This applies to every individual loan and not for all loans within a specific timeframe. So, if, in addition to the mortgage inquiry, you apply for multiple auto loans and personal loans, then you will receive two additional credit score reductions.

Rate shopping is best used when applying for mortgages and student loans, as these often require extensive comparisons and may create a host of inquiries.

However, rate shopping does not apply to credit cards. If you use a comparison site when shopping for a credit card, you can often get most of the information you need without agreeing to a hard credit check, but you still need to be very careful to avoid getting stung.

How Much Will Rate Shopping Hurt my Credit Score?

A hard inquiry will deduct up to 5 points from a FICO score and between 10 and 20 points from a VantageScore. There is no fixed reduction, it all depends on how strong your credit report is to begin with. 

If you have a comprehensive payment history with a wide range of credit, a perfect repayment history, and no collections or delinquencies, the deduction should be minimal. If you have a bad score, with defaults and other derogatory marks, then the opposite is true. 

In any case, the damage will be undone after 12 months and all rate shopping will disappear from your credit report completely after 2 years.

What About Soft Inquiries?

Not all loans or credit card applications will initiate a hard inquiry. Some of them will run a soft inquiry. In terms of the information gathered, they are the same, but with a soft inquiry your permission is not needed, the procedure is much quicker and simpler, and it doesn’t show on your credit report.

You don’t need to concern yourself with soft inquiries and rate shopping, because they don’t show anyway. In fact, many of the soft inquiries on your credit report happen without your knowledge or occur when you check your own credit report.

Inaccurate Hard Inquiries

A lender needs your permission before they can initiate a hard inquiry. If you’re applying online, there will be boxes to tick and terms to read; if you’re applying over the phone or in person, you should be told directly.

It’s possible for one of these inquiries to take place if you’re not paying attention. Let’s be honest, we’re all a little guilty of skipping over terms and conditions and signing anything that’s put in front of us. However, if you’re adamant that you didn’t agree to anything and yet a hard inquiry still appeared on your report, you should take it up with the credit bureau.

Check all inquiries, make sure they actually came from you, and if they didn’t, dispute them. It could be a harmless mistake or oversight, but it could also be the result of a disreputable company or fraudster.

Conclusion: Shop Freely

Remember, rate shopping is factored into all credit scores, but the methods they use and the date ranges they allow differ from system to system. Sometimes you have 14 days, sometimes you have 45. In any case, rate shopping always applies to loans (personal, student, home, auto) and never to credit cards.

This is something that many consumers overlook and don’t discover until it’s too late.