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How To Shop For Credit Without Hurting Your Credit Score

This article is more than 8 years old.

When you apply for most types of credit, a "hard credit inquiry" will appear on your credit report, which can have a negative impact on your credit score. As a result, people are often afraid to shop for lower rates or find better deals. I have met far too many people paying ridiculously high interest rates on credit cards. They are afraid to look for a better deal because of the impact a credit inquiry could have on their score.

The impact of a credit inquiry depends upon your situation. According to FICO, "for many people, one additional credit inquiry may not affect their FICO score at all. For others, one additional inquiry would take less than five points off their FICO score." The impact is much greater if you do not have a long credit history, or if you apply for a lot of credit in a short period of time. But in some cases, even a five point change in score can have a big impact. If you are shopping for a mortgage, five points could cost you thousands of dollars over the life of your mortgage.

In addition to a hard credit inquiry, credit bureaus also offer banks and financial institutions the opportunity to complete a soft credit inquiry. A soft inquiry usually means that you have not officially applied for credit. Instead, you have checked to see what offers are available to you. With a soft inquiry, you can see the details of the product without formally applying. Increasingly, more banks are offering the opportunity to see your offer without hurting your score. Marketplace lenders are also enabling consumers to see their interest rate and loan amount before they formally apply.

And if you are applying for a mortgage, auto loan or student loan you should not be afraid to shop around. Multiple hard inquiries in a short period of time only count as one inquiry.

1.  Check to See If You Are Approved For A Credit Card

Credit card companies give you the opportunity to see if you will be approved without hurting your credit score. Here are links to some of the biggest banks:

Each bank will ask you a few questions to identify yourself. The bank will then complete a soft credit inquiry, which does not hurt your score. They will then let you know if you qualify for an offer.

Read More: Review of the Best Credit Cards

If you decide to proceed with the application, you will have to complete a full application. You will input things like your income and employment status. At that stage, the credit card company will complete a hard credit inquiry. And you may still be rejected. If, for example, you are unemployed the bank may reject you.

The nice thing about this strategy is that you can compare offers across multiple credit card companies and then only have one credit inquiry for the credit card that you want.

2. Apply For A Personal Loan With A Marketplace Lender

Marketplace lenders have been growing rapidly. In 2014, $9 billion of consumer loans were written by marketplace lenders. The most famous lender is Lending Club, which recently went public. Most marketplace lenders offer a simple personal loan product. The most common use of a marketplace personal loan is to pay off high interest rate credit card debt. Lending Club has disclosed that the average borrower reduces their interest rate by 31%.

The application process for most marketplace lenders is different from traditional banks. With most lenders, you will complete a short application. The lender will then complete a soft credit inquiry and let you know if you are approved or declined. In addition, they will tell you how much money you can borrow and the interest rate and fees.

There are many marketplace lenders, and they are trying to grow aggressively. As a result, the pricing continues to get cheaper for consumers. Each lender has its own underwriting and pricing model. So, it pays to apply to as many lenders as possible to make sure you get the best interest rate and price. You can find a list of 19 (and growing) personal loan providers at MagnifyMoney, my website.

Once you select the best loan, a complete application is required. Similar to the process with credit cards, you will then have a hard pull on your credit report. But the good news is that you can comparison shop and only have one credit inquiry at the end of the process.

Read More: How do Personal Loans Work?

3. Shop Around For Mortgages, Student Loans and Auto Loans

FICO recognizes that rate shopping for big purchases is a good idea. So they made sure their model does not punish rate shopping for mortgages, student loans and auto loans. FICO defines a shopping period as 45 days. You can complete as many applications as you want in a 45 day period, and it will only count as one credit inquiry in your score.

For example, if you apply to ten mortgage companies within 45 days, it will only count as one inquiry on your report. As a result, you will only lose a few points.

So, you should feel free to shop aggressively for the best interest rates. Just make sure you complete all of your shopping within 45 days.

You Should Always Look For The Best Deal

There is still a wide variation between banks, credit card companies and marketplace lenders on pricing. You should not allow worries about your credit score keep you from shopping for the best deal. Take advantage of the tools offered by credit card and personal loan companies to see your chance of approval and interest rate before you apply. And shop around for student loans, mortgages and auto loans. The savings can be dramatic.