Does Applying for a Loan Affect Credit Scores?

Your credit scores are important since they affect so many things in your life. They can ensure you enjoy the best possible interest rates, get approved for a rental, and even help you get your dream job.

Consequently, when you are considering a loan you should know whether the process affects your credit scores, and how. Let’s take a look at some of your most important considerations and how to make certain your credit scores stay as high as possible.

You Have More Than One Credit Score

You may have noticed the title of this article mentions credit scores, not credit score. That’s because you have more than one since there are three main credit reporting agencies in the U.S.: Experian, Equifax, and Transunion.

Fortunately, you can access your credit scores for free from Experian and Equifax. Transunion does not offer a free service, but you can use an independent source such as Credit Karma or Credit Sesame for this information.

How Does the Lender Check Your Credit?

The way a lender checks your credit may or may not affect your credit scores, depending on the method they choose: soft credit inquiry or hard credit inquiry.

Soft Credit Inquiry

A soft credit inquiry does not affect your credit scores. Historically, this method was only used by credit card companies so borrowers could find out whether they qualified and what interest rate they could get.

However, soft credit inquiries are now used by select lenders for loans too. Typically, alternative lenders are more likely to offer a soft credit inquiry and a pre-approval process since these perks help them compete with traditional lenders.

Hard Credit Inquiry

A hard credit inquiry is most commonly used by mainstream lenders such as banks and credit unions. It provides them with all the details on your credit report and it is visible to other lenders. It also lowers your credit scores.

Unfortunately, many lenders don’t reveal which type of credit inquiry they use. If you have less than pristine credit, you should ask them which method they use before you apply. The lender can only use a hard inquiry with your explicit approval, which they usually ask for on their application form.

How Many Points Can Your Credit Scores Drop?

There are no set rules regarding how many points your credit scores might drop when a lender uses a hard credit inquiry. Each person’s financial position differs as do their personal circumstances. Nonetheless, the general consensus is you can expect a reduction of between 5 and 10 points.

The credit reporting agencies are quick to point out that hard credit inquiries are less influential than other credit behaviors, so borrowers shouldn’t concern themselves about them too much. However, they can have a huge impact on those with marginal credit scores, few credit accounts, or a short credit history.

VantageScore (a joint credit scoring model created by the three major credit bureaus) points out that “every score point is important and can be the difference between an approval and a denial of credit. And even if you’re eventually approved, a lower score can cost you thousands in added interest due to higher rates. Basically, every point matters a great deal, despite the credit reporting agencies reassurances.

How Long Does a Hard Inquiry Credit Score Reduction Last?

Once again, there is no set rule for how long this reduction in credit scores will last. Nonetheless, the general consensus is that each hard inquiry remains on your credit report for up to two years. However, it may only affect your credit scores for one year, depending on the credit scoring model used.

Clearly, if you are a borrower with a marginal credit score, this reduction is far too long and far too significant.

Will Multiple Hard Inquiries Amplify a Credit Score Reduction?

If you’re shopping around for the best possible rate on a loan, you are right to be concerned whether multiple hard inquiries could destroy your credit scores. However, the credit reporting agencies are far from clear on this matter.

Equifax claims multiple inquiries are counted as a single inquiry, provided they occur within a certain period. However, they also state that period can vary between 14 and 45 days, depending on the credit reporting model.

Experian is equally non-committal. They claim FICO® loan-related inquiries within 45 days are treated as a single inquiry. Yet FICO clearly states “people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports”.

As a result, the possibility exists that applying for many loans from lenders that use a hard inquiry could cause problems. Obviously, if a credit scoring system does not recognize that your multiple inquiries are related to a single search for a loan, they may record these inquiries incorrectly. Of course, getting your credit scores corrected is a near-impossible task.

Consequently, multiple applications for new credit within a short period can make you look like a risky borrower. That is because your debt-to-income ratio would significantly increase should you open multiple lines of credit and your credit scores could take a significant hit.

Even though the credit reporting agencies tend to downplay the likelihood of this happening, they still recommend that you use hard inquiries “sparingly and strategically”. Considering some select lenders now offer soft credit inquiries for loans, you may not want to use lenders that use hard inquiries at all.

Does a Denial for a Loan Affect Credit Scores?

No, a loan denial does not affect your credit scores. However, choosing lenders that use hard inquiries when you apply for a loan certainly will. These hard inquiries also lower your credit scores for at least a year, and sometimes up to two years.

Should you apply through a lender that uses a hard credit inquiry and you’re denied, definitely don’t reapply straightaway. Lenders pay attention to hard inquiries and many in a short time increases the appearance of risk.

While credit reporting agencies may claim hard inquiries are an expected part of the lending process, that is no longer true. Plus, the implications of hard inquiries can be much more that a slight dip if you have less than pristine credit.

Those with a short credit history, few credit accounts, or credit scores that are on the very edge of a particular range can’t afford any reduction in their credit scores. Otherwise, they could drop into an even lower credit range with even fewer credit options.

Can an Installment Loan Improve Your Credit Scores?

Yes, used responsibly an installment loan can positively impact your credit scores in several ways.

First, if you have never used an installment loan it can improve your credit mix. Creditors want to see that you can use various forms of credit well. Consequently, credit mix accounts for about 10% of your overall credit scores.

Second, borrowers that use an installment loan to consolidate credit cards can often pay their debt down quicker since they pay simple, not compound interest. Carrying less debt and paying it off methodically definitely makes the credit reporting agencies happy.

Third, an installment loan offers an excellent way to create a positive payment history. Your payment history constitutes the largest percentage of your credit scores, accounting for around 35 percent. Pay your loan on time and your credit scores could go up.

Finally, using an installment loan to pay off revolving credit card debt lowers your credit utilization ratio since it only measures revolving credit. Lower it and you may bump up your credit scores since it accounts for 30 percent of your credit scores.

Bottomline

Fortunately, times have changed and your loan options aren’t just major banks that use hard credit inquiries which lower your credit score. Do your due diligence, choose a lender with a pre-approval process and a soft credit inquiry, and avoid credit score reductions all together.

Luckily, FlexMoney is an online lender that uses a pre-approval process and a soft credit inquiry. We operate remotely, without fees or unnecessary waits. Many people also get Missouri installment loans an installment loan with us even if they have bad credit, since we do not have minimum credit score requirement.

Our installment loans also have very reasonable income requirements too. Consequently, first-time borrowers, students, pensioners, and those with other steady forms of income paid by direct deposit often qualify for our low income installment loan.

Our process is also streamlined and simple which means applicants sidestep the complexities of mainstream lenders. There is no need for appointments, proof of income, or office visits. Enjoy an easy loan approval instead and apply at your convenience. FlexMoney often issues loans when others won’t help.

Visit us today, complete our 15-minute application form and have our decision in minutes. The process does not affect your credit scores and you’ll immediately see our terms. We offer loans of up to $2,000 with 12-months to repay.

You have everything to gain and nothing to lose when you apply for an installment loan through FlexMoney.