Comparison shopping for loans online can hurt your credit rating
Believe it or not, surfing around on the Internet for a good deal on a loan could actually hurt your chances of getting one.
Lots of banks and finance companies list general information about mortgages, home equity and other loans on their Web sites. But to find out what specific rate you qualify for, you often have to submit a Social Security number so a lender can run a credit check. Too many of these checks can hurt your credit score.
Rasha Elass learned this lesson the hard way. She wanted to refinance her $150,000 mortgage so she hopped on the Internet to compare offers. She applied for rates from nine or 10 lenders over a three-month stretch.
"I took my time. I had no reason to close in a hurry. I wanted to wait for the right offer," Elass says. "Before I knew it, I was getting less and less favorable offers."
Too many credit inquiries
When Elass first started applying she was receiving offers for loans with 7.5 percent interest rates and no points. Several weeks later the offers were for loans with 8.5 percent interest rates and three points. She estimates the changes would have cost her an extra $75 a month in mortgage payments and $4,500 in closing costs.
"All you're doing is shopping around and you're being penalized as if you were an over-leveraged borrower," Elass says.
As the loan offers got worse and worse, Elass contacted lenders to find out what was going on.
"After a while it became clear that it was the number of credit inquiries," she says.
When you apply for a loan, you give a lender permission to pull a copy of your credit report. Each time a lender peeks at your credit history an inquiry appears on your report. Frequent inquiries can be a sign of iffy credit.
"The more inquiries on a borrower's credit file, the more likely a borrower may be not to pay his or her bills as agreed," explains Fair, Isaac and Co., the nation's leading credit scoring firm, on its Web site.
Online: shopping means applying
"In the offline world you don't usually apply for a loan unless you're serious. With the Internet, shopping means applying," Elass says. "You don't know what rate you qualify for unless you apply."
Because getting detailed information means forking over your Social Security number and filling out applications, many online loan shoppers could be damaging their credit scores without realizing it.
Industry experts counter that credit scoring models allow for comparison shopping. At Fair, Isaac, models ignore all auto- and mortgage-related inquiries made in the previous 30 days when calculating consumer credit scores.
Prior to this 30-day buffer period, multiple inquiries made in any 14-day segment are counted as a single inquiry. With all other loans, including credit cards, each application for credit is counted as an inquiry.
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Fair, Isaac's Web site states that while it is true that more people than ever before are shopping online for credit, "research shows that opening several credit accounts in a short period of time does represent greater risk -- especially for people who do not have a long-established credit history. This also extends to requests for credit."
"The inquiries are the least significant factor considered by FICO scoring models," says Craig Watts, consumer affairs manager for Fair, Isaac and Co. "Much more important is how you pay your bills and how much you owe. Those two factors make up two-thirds of a score."
Fair, Isaac would need more information from Elass and the lenders she applied to before it could assess her situation, Watts said. A number of factors could have bumped up her credit scores.
Resist temptation to apply everywhere
It's a possibility consumers should be aware of when they hop online to check out loans. Because of the speed and ease of Internet, you may be tempted to apply for loans from a large number of lenders. Do so only when you're ready to sign on for an offer.
"Shopping around is a great idea. Making multiple applications before you're ready to apply isn't," says Daniel A. Fenton, director of housing for the National Foundation for Credit Counseling.
"Use the Internet as a general information source to develop a short list of lenders."
Once you start applying for loans, be prepared to make a decision within the next four weeks. That's what Elass, who ended up refinancing her home through a credit union, learned from her experience.
"If I had to do it all over again, I would not start shopping until I was ready to close."
By Lucy Lazarony • Bankrate.com
If you are interested on applying on-line please go to:
Mortgage Advantage Inc.
Loan Officer: Axel Martinez