Although minor knocks to your credit score are sometimes unavoidable, their impact will depend on the circumstances.
- Your credit score may change from time to time, such as when you apply for a new loan or a new credit card.
- Although a small drop usually doesn’t have a big impact, in some cases, like just before getting a mortgage, it might.
There may come a time when you decide to apply for a new credit card. Or you may decide to apply for a personal loan to consolidate existing debt or borrow for other purposes. Anytime you do any of these things, the card issuer or lender will need to dig into your credit history and make sure you’re a reputable borrower, and your file will be thoroughly investigated. credit. All of this means that a lender is accessing your credit report to do their due diligence. But each time you receive one of these tough requests, your credit score might drop slightly.
Fortunately, a thorough investigation will usually only lower your credit score by about five to ten points. And for the most part, that kind of drop won’t really be a big deal. But in certain circumstances, even a small blow like that could have negative consequences.
When a Minor Credit Score Blow Matters and Doesn’t Matter
Generally speaking, a 10 point drop in your credit score is not a reason to worry, nor a reason not to apply for a credit card or loan that you think will help you. Imagine you have a credit score of 810, which is considered excellent. If your score drops to 800 after applying for a credit card, guess what – it will still be considered excellent.
Similarly, a score of 690 is considered good. If your score drops to 680, it will remain in the same category. But when your score is about to be too low to qualify for a loan, that’s when you need to worry about a 10-point drop.
Suppose you want to apply for a mortgage. The minimum credit score required to qualify for a conventional home loan is 620. If you have a score of 620 and you apply for a new credit card before applying for this mortgage, at the time you submit this home loan application , your score could drop to 610. This could result in you not being able to borrow for a house.
A small impact on credit rating could also, in some cases, be the difference between a lower interest rate on a mortgage and a higher rate. Imagine you have a score of 750, and based on that, a mortgage lender you work with is willing to give you their lowest available interest rate on a home loan. If your score then drops to 740, that may be just outside that lender’s threshold to snag their lowest rate, and so you may end up with a slightly higher rate.
To be clear, a 10 point drop in credit score will not always cause you to miss a lower mortgage rate. But technically, it could happen.
Still, that doesn’t mean you have to sweat every minor hit to your credit score, especially if it’s already in great shape. However, you should be careful when applying for new credit cards and loans, especially if you know you will be asking to borrow an even larger sum of money, such as a mortgage, in the short term.
Are difficult requests avoidable?
If you want to take out a new credit card or a new loan, it is usually impossible to avoid inquiries about your credit report. But one thing you can do is space out your credit card or loan applications so you don’t have too many difficult applications at once.
There is, however, an exception to this rule. If you’re shopping for a mortgage, it actually pays to apply to different mortgage lenders in the same short period of time – ideally, within 14 days.
In this case, the different serious inquiries on your credit report will all count as one, because they are carried out for the same purpose.
If you buy a house and seek quotes from six different lenders, you obviously aren’t going to take out six different mortgages (whereas if you apply for six different credit cards, you could, in theory, open six new cards). So rest assured that your credit score will not suffer major damage because you do the right thing and shop around for rates.
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