While it is always a good idea to shop around for the best possible interest rates and terms when you’re in the market for a loan, it can also be a fast path to a lower credit score. That’s because each time you actually apply for new credit the lender will order a copy of your credit report. Once that’s done the action is reported to all of the major credit reporting agencies, and it eventually winds up being calculated into your FICO score, the all-important number than determines your credit rating. Rather than helping your score, it lowers it – which is why you should carefully avoid the practice of applying for credit all over town.

 

To many consumers this adverse outcome makes no sense, because applying for credit really has nothing to do with your ability to repay debts in a timely and responsible fashion. While that is certainly true, and while it is also sensible and prudent to shop around before signing up for a loan, lenders view the scenario from a completely different perspective. When lenders and credit reporting agencies see a person applying for loans from multiple banks or loan companies, they automatically percieve the person as desperate.

 

If you are filling out lots of different loan applications simultaneously, lenders believe that it is because you expect that most of them are going to be turned down. They assume that in order to improve your chances of securing a loan, you are applying everywhere in the hope that one of the lenders will not reject you. While that may not be true, lenders assume the worst and view this kind of activity as high-risk borrower behavior. That translates into a lower credit score and can torpedo your chances of getting a loan, so the negative interpretation of consumer activity becomes a self-fulfilling prophecy.

 

What’s the alternative? Shop for loans by interviewing lenders regarding rates, fees, and other costs – but do so without actually applying for a loan. As long as the lender does not pull your credit report, you’re fine. But next time you go to the mall and the clerk offers you a 10 percent discount if you’ll apply for the store’s new credit card, think twice. The $10 you save will cause a “hit” on your credit report, and if that triggers a lower credit rating it could end up costing you thousands of dollars when you apply for a mortgage or try to buy a new car.