Do multiple credit inquiries destroy your credit?
There is a universal myth about the lending and credit industries that can have a negative impact on how you apply for mortgage loans and even how you shop for properties.
Unfortunately, many people believe that multiple credit inquiries will severely lower your score. Checking into your credit just a few times in a week will, according to the myth, cause your score to drop so sharply that you will have to pay higher interest rates, deal with harsher credit terms, and could even be locked away from certain borrowing opportunities.
But is this the truth? Do multiple credit inquiries, especially multiple checks from a mortgage lender, really harm your score.
The truth is simple: no, multiple credit inquiries from mortgage lenders or lending agents in a short period will not lower your score, at least not to a point where it will have a noticeable impact on your borrowing power.
To understand this myth, we need to understand what happens when a lender checks your score, how and when it can lower your score, and why multiple inquiries could be a risk factor.
What Happens When a Lender Checks Your Credit?
Inquiries are one of the few ways that lenders can get information on whether or not you are considering taking on debt. In most cases, an inquiry has a small, practically inconsequential impact on your score. But this impact, no matter how small, is negative. But is it negative enough to matter? Virtually never.
Inquiries are an important part of the mortgage-application process, and they can’t be avoided completely. However, they can be conducted with a wise strategy, reducing their impact on your credit score. Generally, you will want to apply for credit only when you really need to, such as when you are looking to purchase a house or a car with financing. Applying for a credit card, car loan, or other types of consumer credit can negatively impact your score, so it is best to avoid these applications before seeking a mortgage loan.
Why Can Multiple Credit Inquiries Create Issues?
Credit checks can create a variety of issues from the perspective of lenders. Basically, if a lender sees that a potential borrower has made multiple credit inquiries in a short time period, inquiries that come from a variety of different credit lines, it shows a slightly elevated risk.
Statistically speaking, when someone makes a large number of credit inquiries, they are more likely to overextend their finances and take on more debt. This is not to say that someone who applies for a credit card, car loan, and financing for furniture all in one week will automatically default on their loans, it’s simply saying that they are more likely to do so.
And quite frankly, statistical risk is all lender have to work with. There is more statistical risk for a default if the borrower has a lower income, just as there is more statistical risk if the borrower makes multiple inquiries in a short period.
Shopping for a Mortgage Will Not Hurt Your Credit
It’s important that you understand a few basic rules about applying for mortgages, including the rule about the 45-day window. Essentially, within a 45-day period, multiple credit checks from a mortgage lender or lending agent are all recorded as a single credit inquiry. Common sense tells other lenders, as well as the credit bureaus, that you are simply shopping for a single home; multiple inquiries does not indicate that you will take out loans for multiple properties. Lenders know this, so they don’t punish you for over-using credit.
You can shop around for loans, and the impact on your credit is the same: only a minimal dip, if there is any dip at all. This goes for whether you conduct multiple inquiries from one lender, or for a variety of different lenders and lending agents; as long as it happens in the 45-day period, there will be little to no impact on your score.
Even if an inquiry needs to be made after the 45-day period is over, it’s often still worth the effort to make the inquiry, as the impact on your credit score will still be minimal. Shopping for the best deal can be highly beneficial, while getting another inquiry on your report is not that bad.
It’s important to note, however, that the 45-day window only applies to credit checks from mortgage lenders or brokers. If the credit check comes from a credit card company or is related to another form of consumer credit, it will be treated differently. In this case, multiple inquiries could impact your score, assuming they come from sources that are not related to housing.
“Hard Inquiries” vs “Soft Inquiries”
Not all inquiries are the same, and understanding the difference between the two can help you better manage your credit score.
First, let’s start with hard credit inquiries. These occur when you apply for a loan and the lender or loan broker reviews your profile. Hard inquiries happen at your request, and they are required for reviewing your overall profile before mortgage applications, applications for car loans, and applications for student loans.
A soft inquiry is different, in that it is initiated not by you, but by a potential loan or credit provider. Soft credit inquiries actually happen all the time, and they do not impact your score, which makes sense, since you have virtually no control over when and how they occur. Soft inquiries happen when a credit company makes an offer for a new card, when an employer looks into your background. While numerous hard inquiries from multiple credit sources can have a small impact on your score, soft inquiries have no impact whatsoever.
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