Does Applying for Financing Affect Credit?

Each time you apply for financing or a line of credit, the business' name appears on your credit report as an inquiry, showing creditors that you requested a line of credit. An inquiry might slightly affect your credit score but not your lending opportunities, so long as you don't excessively apply for credit.

Score Impact

Your credit score may drop by up to five points when a lender pulls your credit report, although the total point deduction varies by a person's total credit history. If you apply to several lenders for the type of financing, such as a home or auto loan, your credit score might not decrease with each inquiry. Multiple inquiries over a 14-day period for the same type of loan decrease a credit score the same as one inquiry, so long as you initiate a line of credit within 45 days.

Considerations

If you don't initiate a line of credit within the 45-day period, your credit score will decrease for each credit inquiry. If you apply for multiple types of loans during the 14-day period, such as an auto loan and mortgage, your score decreases separately for each type of loan you apply for. For example, if you submit two applications for a mortgage and four applications for a car loan but initiate a line of credit only for the auto loan, your credit score will decrease based on three individual credit inquiries: the two mortgage inquiries that you never pursued and one auto loan.

How Inquiries Appear to Other Lenders

While your credit score may offer some leniency for multiple inquiries, your lender may not. Lenders can't view the reasons you applied for multiple lines of credit. Potential lenders can only view the number of inquiries you've allowed and the time frame between each instance. Your credit report might suggest that you excessively apply for credit, a reason for declining your loan. The My FICO website warns that borrowers with more than six credit inquiries are more likely to claim bankruptcy than those who have less. Inquiries remain on your credit report for two years.

Applying with Credit in Mind

Shop rates before you submit an application to minimize the number of inquiries that remain on your credit report. If you find an ideal lender who offers good interest rates, apply for a pre-approval. If you're approved for the best rate, assume that other lenders will lend similarly, offering the best advertised rate for your loan. Beware of third-party loan providers, such as dealers or rate-shopping websites. These providers may send your credit application to multiple lenders at once.