Low interest rates that continue to defy the odds, along with rising home values have certainly ignited a flurry of refinances.
Some folks, however, may have concerns about too many “credit pulls” lowering their credit scores and as a result, shy away from refinancing.
After all, it would seem counter-intuitive to getting the lowest rate if shopping around pulled your credit scores down, right?
Fortunately, there are laws in place to protect the consumer.
WHAT IS A CREDIT INQUIRY?
A credit inquiry occurs when a lender or other entity pulls your credit report.
It’s important to understand your credit and what makes up your scores, as your credit scores will have a significant impact on your interest rate and whether or not you qualify for a mortgage.
Mortgage lenders use an industry-standard credit scoring model known as FICO. FICO scores range between 300-850.
Credit inquiries will adversely affect your credit scores by approximately 5 points or less. The negative impact will vary according the type of creditor behind the inquiry.
Fortunately, only 10% of your FICO score is made up of “new credit”. Inquiries fall into the category of new credit because they tell other creditors that you are thinking about taking on new debt.
HARD INQUIRES VS. SOFT INQUIRES
There are two types of inquiries that can occur on your credit report – hard inquires and soft inquiries.
Both types of inquires allow third parties to take a peek at your credit, but only hard inquiries will pull your scores down.
Hard inquiries occur when a financial institution checks your credit report for the purpose of making a lending decision. Hard inquiries are common when you apply for a mortgage, a car loan or a credit card.
Soft inquiries occur when a person or entity checks your credit as part of a background check. Unlike hard inquiries, soft inquires will not negatively affect your credit scores.
WILL RATE SHOPPING HURT MY CREDIT?
Each time you apply for new credit you’re going to be hit with a hard inquiry. As noted, hard inquires will pull your score down by a few points.
However, FICO models allow consumers to do some shopping by viewing multiple inquiries within a certain time frame as just one.
The credit bureaus will usually identify the fact that you’re comparison shopping by recognizing the types of credit for which you’re applying.
According to the Consumer Federal Protection Bureau (CFPB), the impact on your credit is the same regardless of the number of inquiries, as long as the inquiries are made by mortgage brokers or lenders within a 45-day window.
However, it’s important to note that some companies are using older FICO models. Some older FICO models allow for just 14 days for multiple inquires to have the impact of just one. For this reason, a good rule of thumb is to try to limit your credit pulls for rate shopping to 14 days.
PULL YOUR OWN CREDIT REPORT
With the many resources available to consumers today, it’s relatively easy to obtain a copy of your credit report.
All three bureaus allow for one free report per year. Various sites such as Credit Karma are a great resource for obtaining a free copy of your credit as well.
Before having several lenders run your credit, it’s a good idea to do some research on your own.
By doing a little due diligence, you’ll not only have an idea of what’s on your credit, but you may also uncover possible inaccuracies that you can clear up. Doing so can ensure you’re getting the possible mortgage rates and terms.
Whether you’re buying a new home or refinancing an existing mortgage, it pays to shop around. Fortunately, the credit bureaus won’t “ding” you for having multiple inquiries due to rate shopping.