Will It Hurt My Credit Score to Change Lenders if We Have Not Signed Any Papers?

Before you sign your life away, there are ways to back out of your relationship with a lender.

Good credit scores can mean low interest rates on loans. However, the amount you pay to borrow money is determined by more than just your interest rate. Administrative fees and points can render your low interest rate loan unreasonable. Choosing to switch to a new lender has its consequences, but among them shouldn't be a penalty to your credit score.

Shopping for Loans

Shopping for loans involves contacting multiple lenders or having a mortgage broker handle the research for you. During the process, you often find a dizzying number of loan packages to suit diverse consumer needs. Consumers with less than average credit may attempt to secure a loan with a great interest rate but find they are denied. Each time you seek approval or prequalification for a loan, your credit score is pulled.

Inquiries

Each time your credit score is pulled to determine your eligibility for a loan, your score decreases. Luckily, when your score is pulled for one purpose, such as shopping for a home or car loan, the score does not decrease as much as it would if you were pursuing many different types of credit. Before you complete any paperwork on your loan, if you have shopped around first, your credit score has dropped.

Contractual Obligations

Before you sign any paperwork with your selected lender, you do not have a loan. You are approved for a loan, but there is no actual loan in your name. At this point, you can back out of your loan. However, if you paid any application or other administrative fees, the money is not refundable as it is intended to cover the time spent processing your paperwork. Outside of your score dropping for the lender to pull your credit score and determine your eligibility, your score will not drop until you find a new lender.

New Loans

During the period you initially shopped for a loan, your credit score dropped a minimum number of points to account for the fact that you were shopping for a loan. Your FICO score begins to drop again after you shop for a mortgage, car or student loan for more than 45 days. Remember that a new lender must pull your credit to qualify you for a loan. If you are within this 45-day period, you do not have to worry about your credit score being lowered.

References

• My FICO: Credit Inquiries