You’re ready to apply for a mortgage loan. When your mortgage lender checks your credit reports will this hurt your three-digit FICO credit score?
The short answer? Probably. Because when a lender pulls your credit after you’ve applied for a car, mortgage or personal loan, that’s known as a hard inquiry. According to FICO, the company behind the FICO credit score, a single hard inquiry could cause your credit score to fall temporarily, usually by less than five points.
But here’s the complicated part: Not all inquiries will do this. And depending on how old your credit is and how many open credit accounts you already have, even a hard inquiry might not cause your score to dip.
As with most matters regarding credit scores, the impact of credit checks can be a bit confusing.
Hard inquiry vs. soft inquiry
There are two types of credit inquiries: hard and soft. The differences between them are important. A hard credit inquiry happens when a third party, such as a lender, bank or credit card provider, requests to view your credit reports after you apply for a new loan or credit card.
A soft credit inquiry usually happens when you request a copy of your own credit reports. A soft inquiry might also happen when a credit card provider or lender checks your credit to determine if it’s strong enough for you to qualify for a loan or credit card that they would like to sell to you.
A soft inquiry, then, will not impact your three-digit credit score because you are not actually applying for more debt or credit.
Soft inquiries happen in the background
Jacob Dayan, chief executive officer and co-founder of Chicago-based Finance Pal, said that soft inquiries often occur without you even knowing about them. This usually happens when creditors check your credit to see if you qualify for their credit card offers, Dayan said.
"If every time a creditor checked your credit for unsolicited reasons it dinged your credit score, everyone would have poor credit," Dayan said. "Therefore, soft pulls do not harm your credit score."
A different story with hard inquiries
A hard inquiry will cause your score to drop because the opposite is true: A hard inquiry only happens when you request new credit or a new loan. Taking on too much new debt or credit makes it more likely that you'll struggle to pay your bills on time. This makes you a riskier borrower, which is why hard inquiries -- the first step to getting new credit or debt -- cause your credit score to drop.
The good news is that hard inquiries have only a small effect on your credit score. Opinions vary, but most credit experts say that a hard inquiry will only cause your credit score to drop by five points at the most. And this drop is only temporary.
Mike Pearson, New York City-based founder of the website Credit Takeoff, says that it’s helpful to remember that a hard inquiry acts in the opposite way of a soft inquiry.
A soft inquiry can be made without your permission, but it does not impact your credit score in any way. A hard inquiry, though, can only be made with your permission. This inquiry can negatively impact your credit score and will remain on your credit reports for two years, Pearson said.
"Getting a hard inquiry on your credit report every once in a while isn't a big deal, because your credit score will rebound and the inquiry will roll off," Pearson said. "Where you have to be careful is applying for too many credit cards in a short period of time."
Shopping around doesn’t hurt – usually
It's always recommended that consumers who are applying for home loans shop around with different lenders to make sure they get the lowest rates and fees. But won't applying for several loans at once trigger an equal number of hard inquiries from lenders? And won't those hard inquiries cause your credit score to fall, especially when so many occur?
Not exactly. The FICO credit-scoring model doesn't punish consumers who shop around for the lowest interest rates, said Sean Messier, Syracuse, New York-based credit industry analyst with Credit Card Insider.
"Shopping around for loans is a rational move when you're in the market for a big-ticket item like a new car or home," Messier said. "Credit-scoring models take this into account."
If you apply, say, to five mortgage lenders in a two-week period, credit-scoring models will treat all those hard pulls as one single hard inquiry, not five. The reason? It's obvious that you are shopping around for the best rate. You won't be taking out five mortgage loans. You’ll be taking out just one, even if five different lenders are checking your credit.
Just make sure that you do this rate shopping within a relatively short period of time. The FICO credit-scoring model allows you to group several auto, student loan and mortgage inquiries into one inquiry, as long as they're done within a 45-day period, Messier said.
It’s different with credit cards
It's important to note, too, that multiple hard inquiries for credit cards aren't treated the same way. If you apply to five credit cards in three weeks, those hard inquiries will be counted as five separate inquiries, not one. That's because you might apply for five new credit cards. And if you get those cards, you’ll dramatically increase the amount of credit card debt you can run up, something that makes lenders nervous.
"In this case, multiple hard inquiries in a short period of time can take a serious toll on your credit scores," Messier said.