Does Applying for Multiple Loans Impact 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, typically, lenders will need 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.

Lenders conduct a credit inquiry or a credit check whenever you actively apply for a loan, credit card, credit line increase, or financing at a car dealership. While the circumstances differ from person to person, applying for a personal loan will typically take less than five points off your FICO score, the most common credit-scoring model.²

There are two types of credit inquiries: a hard credit inquiry (hard pull) and a soft credit inquiry (soft pull).

Hard Inquiry

With a hard inquiry, the lender contacts credit reporting agencies (Equifax, Experian, or TransUnion) for a credit report. 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 Inquiry

Soft credit inquiries 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 score.

People use personal loans for everything from consolidating credit card debt and paying off hefty medical bills to financing home improvement projects. Like all financial information, personal loans are factored into your credit score and appear on your credit report. 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 you to build credit.
• Adding a personal loan may increase your credit mix, which makes up 10% of your FICO score. Having a variety of loans and credit cards may help 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 even though it’s good to pay off debt, you might see a slight dip in your score once you pay your loan in full.

Rate-shopping refers to the process of comparing interest rates and terms from various lenders to determine which loan option suits your financial needs, which can help save you money in the long run. But what about all those hard inquiries?

The good news is that rate-shopping may only have a nominal effect on your score if you bunch your research together within a short window of time. This timeframe varies, depending on the credit score model and in some cases, the type of loan or financing, but it is typically 14 to 45 days.⁴ However, applying for two different types of loans, for example, a student loan and a car loan within a two-week period can count as two separate hard inquiries.

Applying for more loans after the timeframe of 14 to 45 days can negatively impact your credit score. Multiple applications outside of this short period could be a red flag to the lender and may indicate an overreliance on credit. Thus, it may be beneficial to do all your rate-shopping within 14 days to play it safe and minimize the potential impact of hard inquiries.

Being declined for a loan won’t hurt your credit score directly, and the rejection won’t appear on your credit report. Your credit won’t be negatively affected beyond the slight dip from the hard inquiry, which would appear either way, even if you end up getting approved.

And since your score drops with every hard credit inquiry, if you’re denied a loan, it may be best not to reapply straightaway. As stated above, if you apply for multiple loans in a short period, it may damage your credit score and appear as a red flag to lenders.

Before you apply for a new loan or shop for rates, it’s always a good idea to do your due diligence to improve your chances of getting approved. Here are a few tips that can help streamline the process:

• Check your credit score and credit history to understand your creditworthiness.
• Pay off outstanding debt to reduce your debt-to-income ratio.
• Come up with a repayment plan to ensure you don’t fall behind on payments.
• Find out what pertinent financial documents you need to apply.
• See whether you prequalify for the loan with no risk of damage to your credit score.