Does shopping for the best interest rate affect my credit score?

Shopping for interest rates does not necessarily affect a person's credit score. When a borrower submits an application to a lender, the result is what is known as a hard inquiry. There are both hard and soft inquiries.

A hard inquiry occurs when a company lending money makes a request to view a person's credit report with the intention of making a decision about lending to him or her. Credit scores are calculated and determined by the three major credit reporting agencies: Equifax, Experian and TransUnion. In some situations, agencies may take into account that a person is shopping around for rates if multiple hard inquiries about similar loans are made amongst competitors in a short period of time. This period varies from 14 to 45 days. It is still advisable to keep hard inquiries to a minimum — one to two per year, if possible. Furthermore, it is advisable to limit shopping to no more than one type of loan at a time. A hard inquiry may indicate to an agency that a person is desperate for credit or otherwise unable to receive credit. A hard inquiry made without a person's permission may be disputed and removed from the credit report. Hard inquiries made with a person's permission must remain on a report for at least two years. Individuals with fewer hard inquiries have higher average credit scores.

A soft inquiry occurs when a credit report is viewed as part of a background check, when an individual is pre-approved for a credit card as part of a marketing campaign and sometimes when renting an apartment or automobile. A soft inquiry may be made without a person's knowledge or consent. Consumers are also permitted to check their own credit scores online. Checking a credit score or receiving a copy of one's own credit report has no effect on a credit score and is another example of a soft inquiry.

Records of both types of inquiries may remain with the report, but only hard inquiries can negatively affect a credit store.

There are companies online that allow users to view average credit terms posted anonymously by other users with similar credit profiles according to factors such as income, assets and credit score. By using tools such as this users can gain an idea of how much they should be paying to borrow money in a competitive market and if any terms they are being offered are fair. Using these services eliminates the need to make hard inquiries. This practice is potentially a source of a significant cost savings and could allow financial goals to be realized that might not otherwise be possible. A 2-3% savings on a $100,000 mortgage can save tens of thousands of dollars over a 20-year term.

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