A bank loan pre-approval occurs when a bank approves a borrower for a specific loan amount upfront based on the borrower's credit and income. This often occurs for home loans and other large purchases. When you apply for credit, this places a hard inquiry on your credit report. If you're shopping for a bank loan, it's prudent to understand if loan pre-approvals can hurt your credit score.
Ten percent of your FICO score measures the amount of new credit you've applied for recently. How much an inquiry affects your credit score is dependent upon the other data found in your report. One inquiry from a loan pre-approval may not negatively impact your score, according to FICO. Multiple inquiries, however, could lower your score. FICO considers numerous credit applications within a short span of time as an indicator of high risk behavior. This refers to hard inquiries where you apply for credit. Soft inquiries, such as when you check your own credit report, do not affect your credit score.
Although multiple credit inquiries may lower your score, FICO makes an exception for certain types of inquiries. When consumers shop for certain big-ticket items, such as mortgages and auto loans, they often check rates from multiple lenders. This is called "rate shopping" and can lead to multiple credit inquiries from different lenders. According to FICO, if multiple inquiries from shopping for an auto loan or mortgage loan occur within a two-weekweek time frame, FICO considers those inquiries as one to minimize the effect on a consumer's credit.
Rate shopping only applies if the inquiries all occur within a two-week period. If you apply for multiple auto loans and the credit applications are months apart, FICO will count each inquiry separately and not group them together as one inquiry. The more inquiries you have on your report, the more of an impact it could have on your credit score. The affect on your score will vary depending upon the information in your report.
Inquiries remain on a credit report for two years. Lenders and others who check your credit can see the names of companies where you've applied for credit. After two years, the inquiries automatically fall off the report. When calculating your score, FICO only considers the inquiries that occurred within the previous 12 months. To maximize your score, FICO suggests you only apply for the credit you actually need and keep credit inquiries to a minimum.
Mack Mitzsheva is a tax lawyer, personal finance expert and the author of the forthcoming ebook, "10 Best Places to Work Online." Mitzsheva is also a social media entrepreneur with five successful sites under her belt. Always innovative, Mitzsheva is currently developing a cutting-edge budgeting app for newlyweds.