Does Applying for a Loan Hurt Your Credit?

It’s a no brainer. When you make an application for a loan, the lender will make inquiry about your credit history to one of three credit reporting bureaus. ‘Does applying for a loan hurt your credit?’ It can. A lender will look at the information reported on your credit report to determine whether or not you will be a good risk. Your credit score will be evaluated and a determination made of how responsibly you have paid your bills in the recent past. There are a lot of factors that influence your credit score. One of those is how often inquiries are made against your credit report.

If you have a current account open with a creditor that creditor can make an inquiry on your account to determine how well you are paying your bills. These inquiries will have no impact on your credit scores. There is not a set formula that will determine the impact of inquiries on your credit report. One or two inquiries won’t have much impact.

If you are shopping for credit and multiple lenders are inquiring in order to give you an interest quote, the credit bureaus consider these inquiries as one. These inquiries must be for credit shopping and must occur within a short period of time. If you do not have a lengthy credit history or you have few open accounts, the impact of these inquiries will be greater.

Fair Isaac is the company that uses a formula to assign a credit score to your credit report history. Fair Isaac states that six or more inquiries on a credit report show that the individual may present up to eight times greater risk of filing bankruptcy to discharge their debt than someone with no inquiries.

Fair Isaac research indicates that multiple account openings in a short period of time can be indicative of someone who is having financial difficulties and is a higher credit risk. Sometimes individuals who are in a financial bind will apply for multiple loans as an attempt to alleviate their financial difficulties.

If you apply for a credit card, a car loan, or a personal loan the inquiry impact will be the same. If the applicant is trying to get credit cards to pay off other debt, then payment difficulties will ensue, interest rates will be higher, and bankruptcy may be the only viable option. When multiple inquiries are reported to the credit bureau, rate-shopping is ruled out first.

If it is apparent that the inquiries were not related to rate-shopping, each inquiry will be weighted and the credit score will be reduced. With that said, ‘Does applying for a loan hurt your credit?’ The simple answer is that it can, if you do not manage your credit application process.