Are you shopping for a home loan? Sending a child to college so you’re applying
for student loans? Or did you just come
from your favorite store where they offered a discount if you take out one of
their store credit cards. Every time you
apply for new credit it shows up as an inquiry on your credit report – and done
wrong, that could even lower your score.
However, some people become so afraid of having their credit pulled that
they don’t adequately shop for the best loans, losing a lot of money in the
end. What you don’t know can hurt you, so today we’re going to
explain the process of credit inquiries and the impact they have on your score.
Every time a vendor, bank, or merchant requests to see your credit
report, it registers as an inquiry, an event visible on that report. But will these inquiries actually lower your
FICO score?
The short answer is:
it could, but not too much. But it’s
based on two factors: what kind of credit trade line you’re applying for, and the
timing of those inquiries. Remember that
the whole basis of credit reporting and credit reports is to give lenders an
accurate metric to measure the risk of granting you a loan. So when a consumer registers multiple
inquiries (and the wrong kind) it sets off a red flag to risk for lenders. Why?
They’re worried about the consumer applying for credit or loans out of
financial desperation or overextending themselves with debt. So the larger the number of credit
applications and inquiries the greater the risk, and therefore their score
could drop. In fact, people with six
inquiries or more on their credit reports are statistically 800% more likely to
file for bankruptcy!
Now here is the fine print – not all credit inquiries are
treated equally. Some are a logical
function of consumers shopping for the best rates or terms, especially with
big-ticket items like auto loans, mortgages, and student loans. The credit bureaus expect consumers to submit
several applications (and have their credit report pulled) in order to get
quotes from multiple sources when it comes to those loans, so those inquiries
are less likely to adversely affect a credit score, if at all.
However other types of loans are seen as clear indicators of
risky consumer behavior, so the more credit inquiries, the bigger the hit to
their credit score will be. These
include credit card applications, store credit cards, payroll advances and
other inquiries that mark irresponsible financial behaviors. Typically, your FICO score can go down about
5 points per inquiry if you have your score pulled too much by the wrong
vendors. The drop could be greater if
you have few accounts or a short credit history without seasoned, positive
factors to compensate.
The second component of this equation is timing. The more “bad” inquiries that appear on your
credit report within a short time, the harder the hit to your score. For instance, if you apply for 5 new credit
cards within a two-week period, it definitely is seen as risky to the credit
bureaus, and your score will drop accordingly.
But just like there are compensating factors for big-ticket types of
loans like mortgages, the timing of those is also factored in. Shopping for the best rate on one loan (not simultaneously
applying for multiple loans) means getting your credit score pulled several
times within a short period, and that will not hurt your credit score. The bureaus usually just count this group or
batch of inquiries as one if they’re within a 30-day period. So the lesson here is that you absolutely
shop around for the best rates on big, important loans without worrying about
multiple inquiries on your credit report, but try to contain them to within a
30-day period, but avoid multiple credit pulls on other kinds of debt that
signal risk.
The different types of credit inquiries are broken down in
two general groups; hard inquires and soft inquiries. Hard inquiries occur when a bank, financial
institution, lender or credit card accesses your credit report for the purpose
of making a lending decision. Hard
inquiries may lower your score nominally, only by a few points, and stay on
your report for two years. Of course the
negative impact diminishes and disappears over time.
Soft inquiries, on the other hand, are when a person or
company checks your credit report.
Usually these come from when an employer checks your credit, preapproved
credit card offers, and when you pull your own report. Soft inquiries can happen without you giving
permission, so they typically don’t affect your score at all.
Hard inquiries:
- Applying for auto loan, student loan, business loan, or personal loan
- Applying for a credit card
- Applying for a mortgage
Soft inquiries:
- Checking your own credit score
- Pre-approved credit and loan offers
- Background checks employers
Sometimes hard
sometimes soft:
- Applying to rent an apartment
- Verification of identity by a financial institution like credit union or stock brokerage
- Renting a car
- Getting cable TV or internet account
- Opening a checking, savings, or money market account
No comments:
Post a Comment