If you keep a close eye on your credit score, you might notice that it drops shortly after you apply for a loan.
That can happen because of a “hard inquiry” — or lenders checking your credit to decide whether to approve a loan. Scoring models typically view a loan application as potentially increasing your risk as a borrower.
That means your application, whether it is approved or not, can shave a few points off your credit score. And if your score is on the bubble for approval, you may need every possible point.
What does a loan application have to do with my credit score?
Lenders use credit scores to assess your creditworthiness: Can they count on you to pay back a loan (or rent an apartment, or make payments on your phone bill, etc.)?
It’s all numbers and probability. Statistically, people with more credit inquiries are more likely to declare bankruptcy, meaning creditors are at risk of losing their money, according to FICO, a widely used credit score. So credit inquiries, particularly lots of credit inquiries at once, can be a red flag.
However, rate shopping for student loans, mortgages and auto financing that can result in multiple inquiries is treated a bit differently.
In those cases, you have a window of time (14 to 45 days, depending on the scoring model) during which you can apply for as many of those loans as you want with the same effect on your scores as applying for one. This is because lenders expect you to compare rates for those loans, and scoring models don’t punish you for being financially savvy.
How do I minimize hard inquiries?
If you need a loan, there’s probably no way to avoid a hard inquiry. But the score benefit you get from on-time payments will outweigh a short-term point loss from applications.
What you want to avoid is applying and getting turned down. Then you may still need a loan, but you'll have a lower credit score.
Here’s how to make the most of an application:
Be as certain as you possibly can be that you meet the qualifications and will be approved. Some lenders offer pre-qualification, which typically does not involve a hard inquiry and can help you determine whether you’re likely to qualify.
Check terms before you apply, and be sure the loan is a good fit for you.
Avoid applying for new credit for at least six months before you plan to make a large purchase that will require a loan — a house or car, for example.
Why checking your own credit is smart
While a credit check when you apply for credit can cause your score to dip, checking your own credit has no effect on your score.
It’s perfectly safe, and it's a great way to know ahead of time what a lender will see and whether you are likely to qualify.