Some buyers shy away from shopping for a mortgage because they’re worried that the extra credit inquiries will affect their credit score. The truth is that shopping for a mortgage does affect your credit score, but probably not in the way you’re thinking…
A Small Score Reduction
All third party credit inquiries have an impact on your credit score, but some don’t have as big of an effect as consumers seem to think. This number can be lower or higher depending on the length of your credit history and the number of open accounts you have. While the inquiry shows on your report for two years, it only has an effect on your score for one year.
Grace Period for Shoppers
In the case of mortgage and auto loan shopping, where multiple lenders will be pulling your credit in a short amount of time, the Fair Isaac system of credit scoring has a built-in safeguard.
Your FICO score will recognize all similar inquiries within a short amount of time, about 30 days, as one inquiry. It’s best to do all of your mortgage shopping in a short amount of time in order to keep you inquiries down, and to take advantage of loan terms before they change.
Mortgages Improve Credit Scores
Any score reduction that you see on your credit report from a lender inquiry could be easily made up for, plus some by securing and properly maintaining your mortgage. Having a mortgage is a great opportunity to send your credit score moving up the ladder. A mortgage is a type of installment debt, as opposed to credit cards which are revolving debt. The type of debt you have affects your credit score, and the FICO scoring system likes to see a balance between revolving debt and installment debt.
Making payments on debt on time is a huge factor on your credit score, and your mortgage will give you the chance to establish a long-term history of paying debt on time. Other lenders also view maintaining a mortgage as a favorable debt practice, so it will be easier for you to secure accounts in the future if you maintain your mortgage properly.
I think a lot of people forget that even simple inquires of your score from a bank or financial institution can cause your score to go down. Be very careful of who you let check our records and how many times you let people do it.
This comes up all the time when I work with my clients. Yes, if you do your shopping around in a short period of time, the inquiries are treated as one for scoring purposes. If you want an accurate rate quote, you definitely want the lender to run credit. Just make sure to do your shopping within a few days to weeks at most to protect your credit score.
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