What Is Rate Shopping?

What Is Rate Shopping?

Rate shopping typically involves reviewing loan offers from multiple lenders to compare the interest rates and fees they are willing to provide.

Comparing rates before agreeing to a loan can help you get the best rates and terms. While it might seem like you'll find similar loans across all lenders, that's not necessarily the case. Doing your due diligence can make a difference of hundreds of dollars or more over the life of a loan.

Does Rate Shopping Affect Your Credit Score?

When you apply for a loan or credit card, the lender typically performs a credit check, seeking your credit report from at least one of the national credit bureaus (Experian, TransUnion or Equifax) and obtaining your credit scores based on one or more of these reports. Credit checks connected with credit applications are logged on credit reports as hard inquiries, which can lower credit scores slightly.

Credit score reductions connected with hard inquiries are usually small and temporary—scores typically recover within a few months if you keep up with your bills. But multiple hard inquiries for different types of credit within a short time can have a cumulative effect, leading to larger score drops.

How to Protect Your Credit While Rate Shopping

Credit scoring systems such as the FICO^® Score^☉ and VantageScore® have built-in accommodations for rate shopping on installment loans such as mortgages, car loans and student loans. They treat inquiries related to multiple loan applications as a single event, as long as all applications are for the same loan amount and are submitted within a specified time window.

• The FICO^® Score window is a 14- to 45-day period depending on which version is used to calculate the score (stick with two weeks to be safe since you likely won't know which FICO^® Score version the lender uses).
• VantageScore uses a rolling two-week window: If successive applications are submitted within two weeks of the previous one, the effect they have on your score will be equivalent to a single inquiry.

Consider Prequalifying for Credit Cards

Importantly, FICO and VantageScore do not apply the same combining treatment to inquiries related to credit card applications. Nevertheless, you can and should still rate shop when considering credit cards by taking advantage of prequalification. An option available from many card issuers, prequalification provides you with an estimate of the borrowing limit and interest rate you'd get if you formally applied for a card.

Credit card prequalification typically takes only a few minutes and does not result in a hard inquiry, so it won't impact your credit scores. Many credit card issuers have prequalification tools on their websites, and a number of web-based services, such as Experian's card comparison feature, can prequalify you for multiple card offers at once. You may even receive credit card prequalification offers in the mail.

Once you've gathered rates and terms from several lenders or credit card issuers, choose the estimate that looks best and submit a formal application for that loan or credit card. Doing so will result in a hard inquiry and may lead to an offer that differs somewhat from the estimate. If the terms are to your liking, you can take the offer; if you'd like to try for better terms from another lender, go for it. While it will likely mean another hard inquiry, the benefit of finding the right rate will likely outweigh any minor, temporary damage to your credit scores.

The Bottom Line

Shopping for the best interest rates and terms from multiple lenders can help you spot the most competitive credit offers and land the best borrowing terms you can get. Make sure you understand the potential impact on your credit score and consider using Experian's comparison tools for prequalifying for multiple credit cards or personal loans in one step.