The Ticking Clock: How Long You Can Shop Around for a Loan Without Wrecking Your Credit

The Ticking Clock: How Long You Can Shop Around for a Loan Without Wrecking Your Credit

Getting a house or car should be a patient, careful endeavor as you shop around until you find one that fits your lifestyle. The same goes for shopping for a loan to fund your house or car. You want to take your time to find competitive rates that’ll mean lower payments and less stress.

But rate shopping doesn’t just apply to auto loans and mortgages; it applies to student and personal and business loans as well. You want to make sure you’re getting the most bang for your buck, because life is expensive enough without having to pay through the nose because you didn’t take the time to explore your options.

Inquiries—Hard or Soft?

There are two types of inquiries:

  1. Soft inquiries, which don’t affect your credit score, and
  2. Hard inquiries, which do.

When you check your own credit scores, both business and personal, that’s a soft inquiry and your scores won’t be affected.

Hard inquiries influence a small percentage of your score, however, so being concerned with how many inquiries you have is less important than meeting payment deadlines and keeping debt usage low. In fact, in the VantageScore credit scoring model, credit inquiries represent 5% of your score points. For personal FICO scores, one inquiry will mean less than five points off of an individual’s score, so we’re talking small numbers unless you have many inquiries in a 12-month period.

But when you’re rate shopping, it can mean many inquiries, and you need to make sure your credit isn’t taking a big blow. Good news: many scoring models, created by the credit bureaus,  have a “rate shopping” period in which you can shop around for a loan, incur multiple hard inquiries for the loan, and come out with only one inquiry. That means a tiny, five to 10 point change to your scores after you’ve secured your loan.

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The Ticking Clock

But how long do you have to “shop” around for the best rate before you do more damage?

The answer varies depending on the scoring model used and type of credit applications. If you’re shopping for personal or business credit cards, for example, each card application may count as a separate inquiry, because the need for multiple credit cards could indicate financial distress.

When it comes to loans, however, a few rules apply. Here’s how it works for the two main scoring models used to judge a business:

1. VantageScore is the scoring model used by the credit bureaus Experian, Equifax and TransUnion. VantageScore uses a rolling 14-day window in which your credit can take on inquiries from many different types of applications and, as long as they occur within a 14-day window, they will only count as one inquiry.

2. FICO is the score most commonly used by lenders to determine a borrower’s risk. Some FICO scoring models also allow a 14-day “loan shopping” period, whereas others have a 45-day window—how your credit inquiries are treated will depend on which version of the FICO scoring formula is being used.

FICO scores also ignore inquiries for auto, mortgage, and student loans until they are 30 days old, meaning you have about 30 days to get that loan before any negative affect to your credit that might make your rate higher. This rule, however, does not apply to business loans.

Business Credit Scores & Inquiries

When you’re shopping for a business loan, it’s common for lenders to look into both your personal and business credit scores.

How inquiries will affect your business credit score will depend on the scoring model used. For D&B’s PAYDEX score—the score used by vendors and suppliers to evaluate creditworthiness—your score won’t be affected.

For your Experian business credit, an increase in the number of inquiries or applications for loans can negatively affect the business’s Experian Intelliscore. Inquiries will stay on your Experian business credit report for nine months, but are only used in exclusion criteria, so there is no “loan shopping” period for business credit inquiries on your Experian report. This means that once you have one inquiry, the next inquiries will not impact your Experian business credit score.

How to Avoid Damage

To minimize the effect of inquiries on your personal credit, stick to the 14-day window—you likely won’t know what scoring model lenders or creditors you encounter in the future will use, so it’s a good idea not to step outside the bounds set by the strictest model.

Building and maintaining strong credit isn’t easy, but the fundamentals are simple. The best thing you can do to keep strong scores is make on-time payments and keep your debt usage low.

Ready to see your credit data and start building better business credit? Check Your Personal and Business Credit For Free (No Credit Card Required).

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