Does Applying for Multiple Loans Impact Your Credit Score?

Applying for loans can cause a drop in your credit score, but rate-shopping for multiple loans in a short time span may prevent additional credit dips.

By Randi Gollin | American Express Credit Intel Freelance Contributor

5 Min Read | December 15, 2021 in Credit Score

 

At-A-Glance

When a lender makes a hard credit inquiry on your credit file, your credit score may dip five to 10 points – even if you’re approved for the loan.

But if you shop for rates and apply for numerous personal loans within a short time span, the multiple hard inquiries will usually count as one, so your credit score won’t take any extra damage. 

Doing research, prequalifying for a loan, and checking your credit report before applying for a loan can help you minimize the impact to your credit score.

Whether you’re applying for a personal loan or filling out multiple applications for a mortgage, a student loan, or financing at a car dealership, one thing’s for sure: You’re empowering lenders to obtain a copy of your credit report from a credit bureau. But does applying for loans affect your credit score? In a word: Yes. Here’s what else you need to know about how applying for a personal loan can affect your credit score

 

Does Applying for a Loan Hurt Your Credit?

While the circumstances differ from person to person, applying for a personal loan will generally take just five to 10 points – or less – off your FICO score, the most common credit scoring model.1,2

 
This is because whenever you actively apply for a loan, credit card, credit line increase, or financing at a car dealership, lenders contact credit reporting agencies (Equifax, Experian, or TransUnion) for a credit report. This action is called a hard credit inquiry or hard pull. And while FICO scores only consider hard pulls from the last 12 months, those inquiries stay on your credit report for two years.
3

 
Soft credit inquiries, or soft pulls, on the other hand, are more routine, can occur without your consent, and aren’t typically aligned with a loan application – like when you get preapproved credit offers or your credit card issuer increases your credit limit. Soft pulls don’t affect your credit scores. For more on credit inquiries, read “Soft vs Hard Credit Inquires: What’s the Difference?” 

 

How a Personal Loan Affects Your Credit Score

People use personal loans for everything from consolidating credit card debt and paying off hefty medical bills to financing home improvement projects – and typically with far lower interest than using a credit card. Like all financial information, personal loans are factored into your credit score and appear on your credit report. And having a personal loan might even boost your score, even though the initial application will cause a dip. For example:

  • If you’re responsible and make timely installment payments to the lender, the loan can help boost your credit score.
  • Adding a personal loan increases your credit mix, which makes up 10% of your FICO score. Having a variety of loans and credit cards can increase your score.

However, a personal loan can also negatively affect your credit score if you miss payments, since payment history is a major factor in determining your credit score. And you might see a slight dip in your score once you pay your loan off in full. Even though it’s good to pay off debt, paying off a loan can alter your credit mix.

 

Rate-Shopping Can Pay Off 

Rate-shopping and comparing offers for a single loan type can ultimately have a positive outcome. Since you’re investing time in finding the best rates, terms, and options for your budget, you’ll probably pay less at the end of the day. But what about all those hard inquiries?

 
The good news is that rate-shopping will have only a nominal effect on your score if you bunch your research together within a short window of time, typically 14 to 45 days depending on the lender. When lenders for credit types like auto, mortgage, or student loans make numerous hard inquiries in that short window, it usually counts as a single inquiry – as long as it’s for one type of loan.4 In other words, applying for both a student loan and a car loan within a two-week period will count as two hard inquiries.

 
What’s more, if you apply for more loans after the 14- to 45-day period is up, it can actually hurt your credit score. Multiple applications outside a short rate-shopping period may indicate to the lender that you’re a risky borrower. Thus, it may be beneficial to do all of your rate-shopping within 14 days to minimize potential impact of hard inquiries.


It’s also important to note that the credit score benefits of rate-shopping don’t apply to credit card applications. Every credit card application will trigger its own hard inquiry, and again, multiple credit card applications can negatively impact your credit score.

 

Does Being Declined for a Loan Affect Your Credit Score?

If you don’t get approved for a loan, remember: Your credit won’t be negatively affected beyond the slight dip from the hard inquiry, which would appear even if you’re approved.


But before you apply or shop for rates, it’s always a good idea to do your due diligence, come up with a repayment plan, and find out what pertinent financial documents you need to speed up the application process. You can also do a soft inquiry on the lender’s website and see whether you prequalify for the loan – without hurting your credit score.

 
And since your score drops with every hard credit inquiry, if you’re denied a loan, try not to reapply straightaway.

 

The Takeaway

Whenever you apply for a personal loan, lenders will make a hard inquiry into your credit history, which can drop your credit score by about five points. But don’t let that stop you from shopping for the best interest rate and loan terms. Rate-shopping within a short period of time is usually treated as a single hard inquiry and won’t drive your score further down. Plus, if you pay off your personal loan responsibly, it can boost your credit score. 

Randi Gollin

Randi Gollin is a freelance writer, editor, and content strategist who’s covered topics including travel, shopping, and dining for tech and media brands and digital publications.

 

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express. 

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