Prospective homebuyers often get a crash course in credit scores, which reflect your willingness and ability to repay debt. One of the earliest lessons is that applying for multiple forms of credit can actually harm your score. That’s one of the reasons credit experts warn consumers against trying to open five new credit cards to improve their score.
Whenever a company — be it a financial institution, a bank or a car dealer — pulls your credit score, that’s known as an “inquiry.” The nation’s credit reporting agencies track each of your inquiries, month in and month out. The problem is that every credit inquiry has the potential to knock points off your credit score.
And that often leaves borrowers with a couple of important questions: Why, and how will this affect my ability to shop different lenders for an interest rate?
Dangers of Credit
We’ll tackle the “Why?” first. There are several reasons, but the basic rationale is this: People who want a lot of credit typically use a lot of credit. In fact, consumers with six inquiries or more on their credit reports can be significantly more prone (eight times!) to bankruptcy, according to Fair Issac Corp., or FICO, which created the first credit score and is still in wide use today.
Too many inquiries can also make it difficult for you to obtain some of those bigger forms of credit, like, say, a VA home loan.
So what about when it comes time to start looking for a home? Comparing interest rates and loan costs is important for veterans, and the only way to do that is to seek loan prequalification from multiple lenders. But each of those lenders will ask permission to pull your credit score, creating a new inquiry.
Fortunately, the credit reporting agencies are big fans of comparison shopping.
Multiple Credit Inquiries
That means mortgages, auto loans and student loans are treated differently. FICO lumps like-minded inquiries together, which allows consumers to seek loan preapproval from multiple lenders and compare costs, terms and rates. Multiple inquiries won’t affect your FICO score until 30 days have passed. If you secure a mortgage within that 30-day window, inquiries won’t affect your score while shopping.
Not everyone finds a home in the span of a month. When that happens, the agency considers mortgage inquiries within a 45-day span as a single credit check. So if you get preapproval from three lenders but don’t obtain a mortgage, you’ll only be dinged once rather than three times.
FICO says one inquiry will generally shave less than five points from your score.
In the current market, VA lenders are typically looking for a score of at least 620. Veterans and active military members who fall short of that benchmark can contact the Lighthouse Program at Veterans United. This is a special wing of the company that helps prospective buyers develop a plan to repair their credit for free and get on the path to loan prequalification. You can reach a Lighthouse home loan consultant at 888-392-7421.
Photo courtesy of Casey Serin