Last year, my friend Marielys was looking to finance a vehicle. At the time she had what she referred to as “baby credit‖ a short credit history with few accounts. She continued her search for four months and allowed auto lender after auto lender to pull her credit. In the end, due to numerous credit checks, she was denied financing and left with her old Subaru.
Any time you apply for credit (a loan, new credit card, a new line of credit) the lender will request a copy of your credit report from one of the three credit bureaus, Experian, Equifax, or TransUnion. This is noted as an “inquiry†in the applicants credit file. There are two types of inquires–a hard pull and a soft pull.
A soft pull includes requests for your own credit report; credit checks performed by
companies that want to send you a marketing offer (i.e. credit card solicitation); and inquiries made by lenders or other businesses with which you already have an account and inquiries made by prospective employers.“Checking your own credit score will have no impact and these [soft] inquiries don’t appear on the credit report that lenders see,†says Jennifer Costello, director of public relations at Equifax.
But multiple [hard] inquiries in a short period of time can be equated with higher risk. These inquiries are reported on a credit file in situations where a consumer has authorized a company such as a mortgage or auto lender, bank, etc. to request a copy of their credit report explains Costello.
According to myFICO.com, large numbers of hard inquiries statistically show that people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports.
So how do you protect your credit while loan shopping? I posed this question to Fair Isaac, the company that designed the credit scoring model. Let’s get to the bottom of this.
Craig Watts, public affairs director at FICO, provided tips and facts on rate shopping and the scoring model.
- When looking for a mortgage, auto, or student loans, it may cause multiple lenders to request your credit report. The FICO scoring system understands that you are shopping for the best rate, not actually applying for multiple mortgages. To compensate for this, multiple inquiries in any 14-day period are counted as one inquiry.
- In the newest formula, inquires made in a 45-day period are counted as one inquiry. The 14-day period was expanded to 45 days in 2004 because there was such a variety of loan options available to people, Watts says. You can shop around for 45 days without your scores being affected. But please note that not all lenders are using the new 45-day model. “It takes time for all agencies to adjust to the revised formulas, but some never do,†Watts says. Do your homework first and shop within a focused period of time, such as 30 days recommends Watts.
- The FICO scores ignores inquires made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won’t affect your score while rate shopping says Watts.
- For those, such as my friend, who take a longer time shopping for a loan, the “hard†inquires were counted against her credit score. FICO usually subtracts no more than five points from a persons credit score.
- “The only time that inquires really have a significant impact on your score is when you’re new to credit, so there is not much credit history in your credit report for a scoring formula to evaluate,†Watts explains.
- “When you’re new to credit take it slow and don’t apply for more than one or two credit cards in a year,†advises Watts. Opening several credit accounts in a short period of time represents greater credit risk.
Since credit inquiries only account for 10% of your FICO score, Watts says it’s much more important that you pay your bills on time, keep balances low on credit cards and other revolving credit products, and apply for and open new accounts only as needed.
LaToya M. Smith is a staff writer at Black Enterprise.