Fact: If you comparison shop for a mortgage or car loan to try to get the best interest rate, FICO's secret credit scoring algorithms lump together all related inquiries that occur within a short period time. Such credit inquiries have a relatively neutral impact on credit scores.
Fact: The New York Times recently reported that students and parents shopping for the best rates on private student loans DO NOT benefit from the same type of calculations as those shopping for home or auto loans. Translation: each time you compare a new student loan, your credit file gets dinged with another inquiry. Each inquiry can drop your score up to 5 points.
It's a bad equation for students and parents:
Too many inquiries = lower credit score.
Lower credit score = higher rates on student loans.
If you have a thin credit history (as many students just getting out on their own often do), such inquiries may have an even greater impact. Anyone who has shopped for a mortgage knows that a measly five points can make a big difference in qualifying for that higher tier interest rate break.
Apparently the New York State Attorney General's office has stepped in and asked Fair Isaac, creator of the FICO score, to treat student loan borrowers the same as those shopping for mortgages and car loans. The Times reports that Fair Isaac isn't changing its policy any time soon and believes its policy doesn't cause any damage most of the time.
However, at least one credit bureau – Experian – confirmed that that this policy may have an impact on credit scores. And a spokesperson for Sallie Mae, the nation's largest private student loan lender, says the company does, in fact, see the negative impact on credit scores and believes that students should not be penalized for trying to make smart financial decisions.
The Times still recommends comparison shopping with 3-4 lenders, preferably within a week or two. Fair Isaac did say that IF there is any negative impact on credit scores, it is more likely to occur when people apply to smaller or specialized student loan lenders, and a lesser impact when applying to big banks.
The Times' advice:
"Start with a lender or two that your college recommends, since it may have negotiated special terms with them... [shop] one bank, one finance company that specializes in student loans and then [look] for nonprofit loan agencies that work with people in the state where you live or the state where you attend college (or both, if you’re lucky enough to have a choice)."
Check this list of lenders or ask people in the financial aid office whether a nonprofit lender serves the college.
