The Effects of Shopping For a Loan on Your FICO Score

There are two ideas that come to mind that shopping for a loan will or will not hurt your FICO score. But which is right? The answer is they are both right for their own reasons.

10% of the FICO score calculation is your credit inquiries and an inquiry is a review of your credit report. The ones taken into account in the FICO score calculation is when you apply for a new line of credit and a lender checks your credit report. Having too many of these in a short period of time can have a negative effect on your FICO score. So how could both answers correct?

The first and most important consideration is what type of loan are you seeking? Are you looking for a credit card, auto loan, personal loan, or mortgage?

When considering a mortgage, this is one of the single largest purchases a person will do throughout their life. Also, it will need to be paid over a long period of time with most mortgages being a 30 year term. So a frugal and smart consumer must shop around. This is the only way they will get the best deal on something they will be paying for a long period of time. This is realized by the people who developed the FICO score formula and therefore shopping for a mortgage will not hurt your FICO score. This does come with a limitation. You are only given a short period of time to shop of 30 days. If it is not completed in that period of time it will be considered another inquiry. This same consideration is also made for auto loans as this is a larger purchase and needs some shopping.

The type of loan that you are not given the ability to shop is when you apply for a new credit card. You have to select one and not apply for several. Each credit card application submitted will be considered an individual inquiry. The idea with a credit card is that you know the terms before you apply. Also, there is little or no negotiation with the application.

So you must remember it is ok to shop for a loan on those large purchases, but do not do out and apply for ten new credit cards. This will not fare well in calculation of your FICO score.

To read more about the FICO score calculation visit William's website. There you will find more great information on how to get an excellent credit score