Shop for a personal loan but don’t ding your credit score

3 min read

Don’t approach applying for a personal loan the way you might tackle a job hunt or college search, sending out as many applications as possible just to make sure you’re accepted somewhere.

To avoid any potential negative impacts on your credit score when multiple lenders pull your credit report, gather as much information as you can to compare loan terms before you actually apply.

When applying for credit counts as a ‘hard inquiry’

You never have to worry about damaging your credit score when you get a copy of your own credit report. That self-review is what’s known as a soft hit or inquiry, which leaves no mark at all on your score.

The good news is that the ding will be temporary and relatively minor. The difference can be 4 or 5 points, “certainly not enough to swing you from being a good credit risk to a bad one,” Chaplin says.

As Rod Griffin, director of public education for Experian, says: A hard credit inquiry indicates the potential for new debt. Because there’s no new account yet showing up on your credit report, you might say the slightly higher risk assessment resulting from the inquiry represents the fear of the unknown.

How to limit the impact on your credit score

“After a month or two, there will either be a new account on your credit report because you got approved, or there won’t be a new account,” Griffin says. “That doesn’t mean you were declined, but maybe you decided you didn’t want that particular account and withdrew your application.

“If there’s no new account, the inquiry doesn’t represent additional debt, and so it doesn’t represent risk,” Griffin says.

Bruce McClary, spokesman for the National Foundation for Credit Counseling, says the best way to limit the impact that inquiries have on your credit score is to do some homework before you submit an application to a lender. Check out lenders’ websites for information about the loan products and terms they offer, then “put on the lender hat,” McClary says. With your current credit score in mind, think about which offers you’re most likely to qualify for.

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“You can then start to bring your range of selections back within the realm of what is possible and also affordable,” McClary says. “Then, you can go out and submit your application to a lender at that point.”

If you can’t find all the information you need on lenders’ websites or on other Internet sites for comparing loan terms and criteria, McClary advises talking to lenders about your interest in getting a loan.

Ask which loan products would be most appropriate for someone with your credit score. Griffin suggests asking about the possibility of getting prescreened or preapproved, which often counts as a soft rather than hard inquiry into your report.

Read your credit report

Of course, doing these kinds of evaluations requires that you know what your credit score is, which brings up the value of reading your own credit report.

“You should always check your credit report at least once a year and 3 to 6 months before applying for credit,” Griffin says.

When McClary was a credit counselor, he encountered many people who resorted to using subprime lenders because they assumed their credit scores were lower than they actually were.

“As it turned out, their credit score was actually high enough to qualify for much more competitive interest rates with banks and credit unions,” McClary says. “Not knowing their credit score ended up costing them in the long run, by them taking out a 36% signature loan instead of a 15% line of credit.”

Get your credit score for free at myBankrate.

Limit the number of credit applications

If you’re thinking about buying a home, auto or other big-ticket item in the near future, you’ll want to be especially careful about how many credit applications, including personal loans, you take out, Chaplin says.

When you finally apply for that mortgage or car loan, you won’t have to be concerned about how the number of inquiries might affect your credit score.

“Depending on the credit scoring system, they may either completely omit those inquiries from the score … or they may lump them in together and count them as 1 inquiry only,” Griffin says.

On the other hand, every personal loan application is treated as an individual inquiry. “It’s wise to apply only as you need credit, and to do so judiciously,” he says.