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April 24th, 2015 by Jason M. Kaplan, Esq.

Improving Your Credit Scores: The Rule Of 45

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Improving Your Credit Scores: The Rule Of 45

 

No matter what you buy, shopping around for the best deal is always a good idea and finding the best interest rate on a new mortgage, student loan, or financing for a new automobile can be a challenge. The problem is, everyone knows that every time you apply for credit, a credit report is requested by the potential lender. Every time a report is requested, it counts against your credit. So applying with multiple lenders will make it more difficult to secure a loan and you will end up paying a higher interest rate in the end.

 

Does Applying For Credit Negatively Impact Credit Scores?

 

Every time you apply for a credit card, the credit inquiry does appear on your credit report. The same holds true for personal loans or open lines of credit. Lenders tend to view applying for several lines of credit to be a possible indicator of financial instability, making it look as though you may be “a higher lending risk”.

However, when it comes to mortgages, student loans, and automobile financing, The Rule of 45 comes into effect. Most people have never heard of The Rule of 45 as it applies to credit, but it is something we all need to be aware of.

 

When does The Rule of 45 apply?

 

The three biggest expenses are purchasing a home, purchasing a vehicle, and financing educational expenses. When it comes to financing these expenses, even a slight difference in the interest rate can mean a difference of thousands of dollars in repayment.

As much as people think the major credit bureaus are faceless corporate entities with a hidden, or not so hidden, agenda of making life difficult for just about everyone, that really isn’t the case. This has never been more evident than in the case of The Rule of 45.

 

What is The Rule of 45?

 

The Rule of 45 deals with the multiple credit inquiries made when a person is attempting to secure financing for a mortgage, automobile, or education. Because these types of loans deal with such large sums of money, people obviously want to get the best interest rates possible, and that means applying for the financing with several lenders. In this video, Damon DeCrescenzo, CEO of The Credit Pros, explains the ins and outs of The Rule of 45 and how it minimizes the effect of multiple credit inquiries:

 

 

The Rule of 45 basically says that multiple credit inquiries for the three largest types of financing can be made within 45 days and only be counted as one inquiry, significantly reducing the effect on your credit report. It only applies to one type of financing at a time, though, so you can’t combine inquiries for a mortgage and an auto loan within those 45 days. There are a few details which can be a bit confusing, but it is one way the credit industry works to the advantage of individuals. Watch the video for more details on the rule of 45 and how it can improve your credit report.

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