shopping for loans online can hurt your credit rating
it or not, surfing around on the Internet for a good deal on a loan
could actually hurt your chances of getting one.
Lots of banks and finance companies list general information
about mortgages, home equity and other loans on their Web sites.
But to find out what specific rate you qualify for, you often have
to submit a Social Security number so a lender can run a credit
check. Too many of these checks can hurt your credit score.
Rasha Elass learned this lesson the hard way. She
wanted to refinance her $150,000 mortgage so she hopped on the Internet
to compare offers. She applied for rates from nine or 10 lenders
over a three-month stretch.
"I took my time. I had no reason to close in a hurry.
I wanted to wait for the right offer," Elass says. "Before I knew
it, I was getting less and less favorable offers."
Too many credit inquiries
When Elass first started applying she was receiving offers for
loans with 7.5 percent interest rates and no points. Several weeks
later the offers were for loans with 8.5 percent interest rates
and three points. She estimates the changes would have cost her
an extra $75 a month in mortgage payments and $4,500 in closing
"All you're doing is shopping around and you're being
penalized as if you were an over-leveraged borrower," Elass says.
As the loan offers got worse and worse, Elass contacted
lenders to find out what was going on.
"After a while it became clear that it was the number
of credit inquiries," she says.
When you apply for a loan, you give a lender permission
to pull a copy of your credit report. Each time a lender peeks at
your credit history an inquiry appears on your report. Frequent
inquiries can be a sign of iffy credit.
"The more inquiries on a borrower's credit file, the
more likely a borrower may be not to pay his or her bills
as agreed," explains Fair,
Isaac and Co., the nation's leading credit scoring firm, on
its Web site.
Online: shopping means
"In the offline world you don't usually
apply for a loan unless you're serious. With the Internet, shopping
means applying," Elass says. "You don't know what rate you qualify
for unless you apply."
Because getting detailed information means forking
over your Social Security number and filling out applications, many
online loan shoppers could be damaging their credit scores without
Industry experts counter that credit scoring models
allow for comparison shopping. At Fair, Isaac, models ignore all
auto- and mortgage-related inquiries made in the previous 30 days
when calculating consumer credit scores.
Prior to this 30-day buffer period, multiple inquiries
made in any 14-day segment are counted as a single inquiry. With
all other loans, including credit cards, each application for credit
is counted as an inquiry.
Fair, Isaac's Web site states that while it is true
that more people than ever before are shopping online for credit,
"research shows that opening several credit accounts in a short
period does represent greater risk -- especially for people
who do not have a long-established credit history. This also extends
to requests for credit."
"The inquiries are the least significant factor considered
by FICO scoring models," says Craig Watts, consumer affairs manager
for Fair, Isaac and Co. "Much more important is how you pay your
bills and how much you owe. Those two factors make up two-thirds
of a score."
Fair, Isaac would need more information from Elass
and the lenders she applied to before it could assess her situation,
Watts said. A number of factors could have bumped up her credit
Resist temptation to apply
It's a possibility consumers should be aware of when they hop
online to check out loans. Because of the speed and ease of Internet,
you may be tempted to apply for loans from a large number of lenders.
Do so only when you're ready to sign on for an offer.
"Shopping around is a great idea. Making multiple
applications before you're ready to apply isn't," says Daniel A.
Fenton, director of housing for the National
Foundation for Credit Counseling.
"Use the Internet as a general information source
to develop a short list of lenders."
Once you start applying for loans, be prepared to
make a decision within the next four weeks. That's what Elass, who
ended up refinancing her home through a credit union, learned from
"If I had to do it all over again, I would not start
shopping until I was ready to close."