Thanks to David Levy of Scripps College for passing along this notice from Fair Isaac, the developer of the FICO credit scoring system. Two key points discussed in the announcement are:
- "Student loan shopping inquiries made during a focused time period (for example 30 days) will have little to no impact on your score."
- "Then try to finish your rate shopping and finalize your loan within 30 days. Not only will loan rates be easier to compare when the quotes come only a few days apart, but you also will protect your FICO score."
Why is this such great news? The interest rates and fees on private student loans are determined only after you have applied for the loan. Previous concerns about the potential negative impact on FICO scores of multiple student loan applications had prevented shopping around for loans. This announcement seems to indicate that borrowers can now shop around for the best rates rather than just settle for applying to one lender and wondering if they got the best rate.
How do FICO scores consider student loan shopping?
The growth of the student loan industry has increased public interest in how lenders assess the credit risk of young college-bound adults. Both large and small lenders often use FICO® credit scores to help them underwrite student loans. How the FICO credit scoring formulas treat credit inquiries depends on the way in which those inquiries are reported by lenders to each of the three credit bureaus. If the inquiries are reported by the lender in a manner that indicates rate shopping for a single loan (such as a mortgage, auto, or student loan), the FICO scoring formula reflects that in its calculation of your score (for a more comprehensive discussion of rate-shopping and inquiries, click here). In general, student loan shopping inquiries made during a focused time period (for example 30 days) will have little to no impact on your score. In the rare instance in which a credit inquiry related to a student loan is not coded so that it receives our special rate-shopping inquiry logic, that inquiry typically would decrease one’s FICO score by only a few points.
What's the best advice for people shopping for student loans so they protect their FICO scores?
Doing a little homework first is always a good idea no matter what type of credit you're seeking. As you're shopping for the best student loan rate, the lenders you approach may request your credit report or credit score. You can generally avoid having those inquiries affect your score if you finish your rate shopping in a reasonable amount of time. That's easier if you first do your homework ahead of time and decide which companies to get quotes from. Then try to finish your rate shopping and finalize your loan within 30 days. Not only will loan rates be easier to compare when the quotes come only a few days apart, but you also will protect your FICO score.
Refer to credit inquiries, for more information on the impact inquiries have on FICO scores.