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Does Applying For Loans Affect Your Credit Score?

3-minute readSeptember 21, 2020

If you’re thinking of buying a home soon, your credit score matters. With a higher credit score, you have the opportunity to receive lower interest rates. With lower interest rates, you can keep more of your hard-earned money because you’re not shelling out as much to your lender.

Due to the expensive grind of daily life, sometimes we need to take out loans to get by. When we apply for those loans, our credit score has the potential of being negatively impacted. That’s right. Your “loan ranking” can be affected by your desire to get another loan. Irony at its best.

To make sense of this, let’s dive deeper into the credit score process itself.

Why Do Lenders Need To Check My Credit Score

In order for lenders to ensure you’re a good borrower, they use your credit score as a barometer for your credibility. A higher score means you’re a more desirable borrower in the eyes of the lenders.

There are five factors that affect your credit score:

  • Payment History: Your ability to pay your bills on time (35% of your credit score)
  • Credit Utilization: The amount of credit you’re using based on what’s available to you –keeping this low is key. (30% of your credit score)
  • Length of Credit History: How long you’ve been borrowing (15% of your credit score)
  • Credit Mix: The different types of loans you have including mortgages, student loans and credit cards (10% of your credit score)
  • New Credit: Your ability to obtain and maintain new credit (10% of your credit score)

This last factor called “new credit” is the one that can be affected by applying for new loans, but that depends on what type of inquiry we’re talking about. There are soft inquiries and hard inquiries.

Soft inquiries are used for educational purposes. This includes things like a background check and credit preapproval, as well as taking the time to review your own report and score. These types of inquiries have no impact on your credit score.

A hard inquiry is a whole different story. This happens when you’re establishing credit through means such as a mortgage, credit card, student loans or auto loans.

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How Many Points Does A Hard Inquiry Affect Your Credit Score?

According to TransUnion®, a typical hard inquiry can negatively impact your credit score by around 5 points per inquiry. Given that the “new credit” factor only accounts for 10% of your overall credit score, this isn’t the end of the world but it is something to consider if you’re looking for that excellent credit score rating.

When you’re shopping around for your next loan, try to do your research first without applying for multiple loans “just to see if you’ll get approved.” This type of activity will stack up the hard inquiries one after another. Those little 5-point increases will start to seriously add up.

How To Check Your Own Credit (Without Affecting Your Score)

Checking your credit is something that should be on everyone’s to-do list as a smart way to stay financially fit. Just like monthly budgeting, you feel more in control of your financial future when you know your numbers.

Rocket HQSM is a free tool that provides your free TransUnion® credit report and score. This handy app breaks down your credit score into the five factors mentioned above (payment history, credit utilization, length of credit history, credit mix and new credit) and gives you helpful advice on how to improve it.

In addition to the analyzation of your credit score and report, Rocket HQSM also informs you of important activity regarding your credit. In fact, I applied for a new credit card last month and the app gave me the heads-up that a hard inquiry had occurred. Ding!

It’s important to remember that checking your own credit has no impact on your score. This is a smart move that everyone should do, and Rocket HQSM just makes the process easier.

The Bottom Line

Hard inquiries will affect your overall credit score but not by a severe amount. Focusing on paying your bills on time and limiting your credit utilization will have the largest impacts.

Maintaining a high credit score takes a lot of personal responsibility and practice. The entire process becomes a lot easier when you’re using helpful free tools like Rocket HQSM. As a user myself, I definitely recommend trying it out.

As you determine the best next steps, consider speaking with a financial expert or advisor before making any major finance-related decisions.

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