Rate shopping and your credit scores?

Young couple looking at blueprints and a computer to find the best rate for a mortgageImage: Young couple looking at blueprints and a computer to find the best rate for a mortgage

The best part about credit scores seems obvious. When it comes to interest rates, deposits and credit card terms, your good credit score can potentially save you money. What more do you need to know?

There are moments when this connection is less obvious though. When you’re shopping for the best deal on a mortgage or car loan, the rules determining your credit score can seem like a hindrance.

Many worry that shopping around for the best rates, a habit that is seemingly crucial to getting good terms, will adversely affect their credit scores. If a prime benefit of having a good credit score is potential savings, but shopping around for the best deal on a mortgage will hurt your credit score, then what’s the point?

Read on to dig in.

So will rate shopping hurt my credit score?

Yes and no. You probably know that each time you apply for a new line of credit you’re normally hit with a hard search. Hard searches can negatively affect your score, so moving from lender to lender and piling up a bunch of these in a small period of time is not a great idea.

In most cases, a single hard search is unlikely to play a major factor in whether you’re approved for a new credit card or loan. But multiple hard searches in a short period could lead providers to think you’re in financial trouble.

Since most hard searches stay on your credit report for 12 months, you may want to consider spreading out your credit card applications over time.

What else can I do?

Your credit scores can play a big role in your financial life. So taking the time to build your scores can help improve your chances of being approved for the financial products you want.

Before having a bunch of lenders run searches on your credit, do some research on your own. Consult the lender’s website as well as third-party forums to learn about the terms commonly offered to those with similar credit profiles. This way you can narrow down your choices before you start applying and your credit is searched.

Another tip that could keep your credit score from dropping is to only apply for one type of credit account at a time. For example, if you’re in need of a mortgage, you may want to wait until later to get yourself a new car and the accompanying car finance. Attempting to secure too much credit at one time may give lenders the impression that you’re desperate for cash or unprepared to handle your debts responsibly.

More generally, it’s best to go into the process with your credit health in great shape. Knowing that a few hard credit searches might dip your score a bit, prepare yourself by otherwise checking that your credit report is spick-and-span and ready for a little bit of a stress test. Monitor your credit and dispute any inaccuracies beforehand to help get you in the best position to get a great deal.

Bottom line

Too much hunting around when using hard credit searches for the best terms on a new line of credit can be harmful to your credit score. However, if you go about the process responsibly, you can achieve the benefits of comparison shopping without causing undue damage to your credit profile. All you have to do is be cautious and shop wisely.