Why Applying for Multiple Loans Can Hurt Your Credit Score

We’ve all had that moment when we decide to get serious about a big purchase. Maybe it’s a new car, a big piece of furniture, or a new shed for your backyard.

When it comes to applying for a loan, it may seem smart to submit as many applications as possible with different lenders so you can find the best offer. But that strategy can hurt your credit score if each application triggers a hard inquiry on your credit report.

There is some good news, though. If you’re rate shopping for the same type of loan — such as a mortgage or auto loan — credit scoring models may count multiple inquiries within a short window as just one. But that exception doesn’t usually apply to credit cards or mixed loan applications.

Trust me, this is something I learned the hard way. When I was shopping for my first car, I applied with several different lenders to see what rates I qualified for.

What I didn’t know (at the time) was that all of those went on my credit report as hard inquiries. I was shocked when my credit score dropped, and those inquiries stayed on my credit report for two years.

Thankfully, there are strategies you can use to minimize the impact. Let’s talk about how the process works and how to protect your credit score when applying for loans.

There are two types of inquiries a lender can initiate during the loan application process. It’s important to know the difference between soft inquiries and hard inquiries since one can impact your credit score, and one doesn’t. 

What is a Soft Inquiry?

With a soft inquiry, or soft credit pull, a lender or creditor takes a quick peek at your credit report to see if you’d be a good candidate for a loan. 

It’s not an in-depth review, but lenders may get a general idea of which accounts you have open, public records, including you’ve ever filed for bankruptcy, and a top-level overview of your credit health. 

Some lenders conduct soft credit pulls without you even asking. Maybe you’ve received those ‘prequalification offers’ in the mail from credit card companies and other lenders and thought to yourself: “Why are they sending me this? I never even applied for anything? “

This means they previewed your credit situation with a soft inquiry, which doesn’t impact your credit score at all. 

This has happened to me so many times, and it can seem like a coincidence. 

I may ask myself: “How did that lender know I was considering a new credit card?” Or “Who told them I just bought a car 1.5 years ago, and am considering refinancing my loan?” 

Sometimes these offers are annoying to get in the mail, but other times, they arrive right when I am considering a small personal loan or a 0% intro APR credit card for a balance transfer.

Some lenders also have prequalification forms online, which can be nice when you don’t want to commit to a lender right away — or get hit with a hard inquiry.

What is a Hard Inquiry?

A hard credit inquiry usually happens when you actively apply for a loan, and you must opt in or approve a lender pulling your credit report. This is where lenders and creditors do an expensive review of everything that’s on your report.

Let’s say you’re a recruiter for a company. A soft inquiry is like asking a few people about a candidate and browsing their LinkedIn profile. 

A hard inquiry is the equivalent of assessing their resume and cover letter, looking at past work samples from their portfolio, calling professional references, and verifying past employment.

Hard credit inquiries reveal your current balances, detailed payment history (including late or missed payments), addresses, past employers, total credit utilization, and more. When you allow lenders to view your full credit report, a hard inquiry will show up on your credit report as part of the “inquiries” section. 

New credit — which includes hard inquiries — makes up about 10% of your FICO score. This may seem like a small amount, but it still has a noticeable impact, especially if you get too many hard inquiries in a short time frame. 

Most lenders don’t like to see too many hard inquiries for credit cards in a short time because it can imply that you’re desperate for funding. 

But credit scoring models understand that most people would prefer to shop around to ensure they get the best rates and offers. That’s why FICO and VantageScore allow for some comparison shopping within a specific timeframe. 

How the Grace Period Works

If you’re shopping for a loan for a car, for example, you’ll receive a hard credit inquiry for each application you submit. But if your hard inquiries are all for the same type of loan, credit scoring models may treat them as a single inquiry if they all appear around the same time. 

Usually, there’s a grace period window ranging from 14 to 45 days. That way, you don’t have to hold back on exploring loan options for fear of damaging your credit in the process.

This leniency doesn’t apply to all financing, though. It tends to kick in for borrowers shopping for auto loans or mortgages, but doesn’t exist for other types of credit, such as credit cards or personal loans, so keep that in mind. 

The Danger of Mixed Applications

Just to be clear, you can’t mix applications for loans or credit products and expect the rate window-shopping exception to apply to your credit report. If you apply for a credit card, a car loan, and a personal loan all in the same week, you’ll receive three different hard credit inquiries.

This is something I’d never recommend doing in the first place, since it can signal financial distress to the algorithms that are reviewing your applications. 

Lenders are in the business of extending credit to those who need and want it, but their main goal is to earn money from the interest they charge. 

Lenders and creditors view risky behavior, such as applying for multiple loans around the same time, as a red flag that you may not be in a good financial place. 

And if that’s the case, it may be hard for you to manage a new loan and repay it on time, which puts the lender at a huge risk. This is why my advice is to never overuse your borrowing power or rely too much on credit. 

Now that we know all about how not to shop for and apply for a loan, let’s talk about how to safely shop for loans and protect your credit score at the same time. 

It takes time and lots of effort to build a good credit score, so you’ll want to be extra careful and take these steps to maintain it when applying for loans.  

Use Prequalification 

Knowing what I know now, I will always try to prequalify when shopping for a loan, and I recommend you do the same! There’s really no reason to jump straight to a formal application unless you are 100% sure you know which lender you want to work with and have an excellent credit score to increase your chances of approval. 

Instead, I recommend you play it safe and use either an online loan marketplace or get preapproved for a loan directly before you officially apply. Online loan marketplaces are free to use, and the process usually starts with only a soft credit inquiry. 

You’ll enter some personal information about yourself, then you can shop around and compare loan offers and interest rates from different lenders. 

From there, you can select a lender that sounds best to you and start a formal application. At least then, you’ll know what other options exist, and it just feels better to be preapproved. Even though it doesn’t guarantee final approval, it’s a hopeful start. 

Space Out Your Applications

Another thing you can do to protect your credit score is to let time pass between applications. Let’s say life happens, and you truly need a balance transfer credit card in addition to a car loan or personal loan. 

Try to prioritize these needs and stagger them a bit if you can.

The more you space out applications, the better, because you’ll have fewer hard credit inquiries that add up to credit score impact and lender skepticism. 

Improving your credit score is hard work. There are so many factors that contribute to it, and one of the easiest ways to keep your score intact is to be strategic when applying for loans. 

Understanding how hard inquiries work, who sees them, and some of the forgiving loopholes (like the rate shopping window) is a great start, but you should have a plan.

Remember that timing can be a big part of your financing strategy. So, try to limit hard credit inquiries as much as possible and carefully consider your needs before you apply for any loans or credit cards.