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Applying for new credit triggers a type of credit check known as a hard inquiry, which can cause a small, temporary drop in your credit scores. Except when you rate-shop for installment loans, multiple credit applications over a short time can have a cumulative effect that leads to an appreciable decline in credit scores.
Here's what you need to know about applications for new credit, the hard inquiries they generate and how to protect your credit scores when seeking new credit.
How Do Credit Applications Affect Your Credit Score?
When you apply for a new credit card, loan or financing, the credit issuer typically performs a credit check. They request your credit report from at least one of the three national credit bureaus (Experian, TransUnion or Equifax) and, often, have a credit score generated from each requested report.
They use the report and score to decide if you're eligible for credit. If you qualify, they typically also use your report and score to help determine how much they are willing to lend (or how high a borrowing limit to give you) and what interest rate they'll charge.
When a bureau receives a request to see your credit file, it adds a hard inquiry entry to your credit report. Hard inquiries could indicate you've taken on new debt that hasn't yet appeared as a new account on your credit report—and which could impact your ability to pay your other debts. In light of that, credit scoring systems typically respond to hard inquiries by lowering your credit score a few points. The score drop typically rebounds within a few months if you keep up with all your debt payments.
Your credit report also lists soft inquiries—credit checks unrelated to credit applications—including those you conduct yourself when you request a credit score or view your own credit report. Soft inquiries never affect your credit scores, so there's no need to avoid them.
How to Reduce the Impact of Multiple Credit Applications
Here are some tactics for preventing multiple credit applications from adding up to a significant drop in credit score:
Wait Between New Credit Applications
The simplest way to avoid cumulative inquiry-related credit score reductions is to avoid submitting more than one application every six months or so. This approach works well when there's no rush—if, for instance, you'd like greater credit card purchasing power but have no pressing need to use it. Hard inquiries remain on your credit reports for two years, but their impact on your credit scores is significantly reduced after several months, as long as you're keeping up with your debt payments.
Use the Rate-Shopping Exception
When you seek a mortgage or auto loan, it's wise to compare loan offers from multiple lenders to get the best interest rate and terms you can. To encourage this practice, known as rate shopping, the FICO® Score☉ and VantageScore systems treat multiple home or auto loan applications in close succession as one hard inquiry. For newer FICO® Scores, this applies to all similar applications made within a 45-day window; the VantageScore and older FICO® Scores apply a rolling 14-day window.
Take Advantage of Prequalification
While the decreased impact on your credit only applies to certain loan products, you can (and should) still compare offers when considering other credit products, such as credit cards and personal loans. A good way to do so is by taking advantage of the prequalification option available from many lenders. Prequalification involves a soft credit check and gives you an estimate of the rates and terms you may qualify for—it isn't official approval for credit. Services such as Experian CreditMatch™ can even show you prequalifications for multiple card offers at once.
How to Improve Your Approval Chances
Before applying for a loan or credit card, take the following steps to help increase your chances of approval.
Ensure Your Credit Reports Are Accurate
Check your credit reports at the three national credit bureaus and review them carefully for inaccuracies. Misreported late payments, accounts you don't recognize listed as delinquent or assigned to collections, and other discrepancies can hurt your credit scores (and could signify identity theft or other forms of credit fraud.) If you see any inaccurate information in your credit reports, you have the right to dispute it and correct the record.
Check Your Credit Score
Checking your credit score will give you a good idea how lenders will view your creditworthiness. Lenders don't always disclose their minimum credit score requirements, but the most attractive deals and user benefits are typically reserved for applicants with credit in very good or exceptional ranges, while users with scores in the poor range may have difficulty qualifying for many offers at all.
Spruce Up Your Credit
If you're not happy with what you see when you check your credit score and the contents of your credit reports, consider taking steps to improve your credit:
- Pay down high balances. Credit utilization rate—the outstanding balance on a revolving account, expressed as a percentage of its borrowing limit—has significant influence on credit scores. If you have accounts with high balances, you may see credit score improvement within a few months of bringing their utilization to less than 30% or, better still, down to under 10%.
- Pay off collection accounts. Recent credit scoring models ignore third-party collection accounts that are paid off. Not all lenders use the latest scoring systems, but paying off collection accounts could mean a boost in the scores reported to some potential lenders.
You can't turn a fair score into an exceptional one in a span of a few months, but adopting sound credit habits over the long term should help you see steady improvement over time.
The Bottom Line
Applying for too many new credit accounts over a short period of time can have a cumulative negative effect on your credit scores. While the extent of that impact will vary, it's easy to avoid by taking care to apply for new credit sparingly and to be strategic when you do. When you're ready to add to your credit portfolio, checking your FICO® Score from Experian can help you know where you stand with potential lenders.