“I don’t want you to pull credit because my credit score will drop”. This is a phrase I hear all too often when I am working with potential home buyers. So instead of having the fear without understanding the impact an inquiry has on your credit score, I figured I would explain how inquiries really impact you and your credit score.
First, there are two types of inquiries: hard inquires and soft inquires.
- Hard Inquiries are those that you authorize and initiate. This can include applying for a credit card, auto loan, mortgage loan, etc. This is where you have given your authorization to run a credit report for the purpose of obtaining credit or debt.
- Soft inquiries are those done without your knowledge by companies interested in the possibility of soliciting you for business and possibility of gaining your business in the future. Typically, this is done by credit card companies and the result is a “Pre-Approved” credit card offer in the mail.
Hard inquiries are the only inquiries that can have an impact on your credit report. The soft inquiries do not even show no your credit report and therefore, do not impact your score at all. So, how do those hard inquiries impact you? Consider the formula, if you want to call it that, for determining your score:
- 35% Payment History
- 30% Current Debt
- 15% Length of Accounts Opened
- 10% New Credit
- 10% Type of Credit
An inquiry, per the explanation of a hard inquiry, is your interest in obtaining debt, or new credit, and therefore an inquiry will impact a part of the New Credit portion of the formula. So, consider that New Credit is only 10% of your overall score and inquiries are only a small portion of the New Credit category. This means that inquiries have very little impact on your score, but they can have an impact.
Inquiries can have an impact on your score when you are looking to obtain different types of debt in a short period of time. Imagine looking to buy a house, obtain homeowners insurance, buy a car, get a quote on auto insurance and apply for a credit card all within a month or two. You would have a minimum of 5 inquiries from different companies in different types of credit. This can have a dramatic impact on your credit as it shows you are looking to establish 5 new lines of credit that would have a short time since the account was opened therefore impacting both the New Credit portion of the formula and the Length of Accounts Opened category. A nice thing to know is that you can shop around for debt without being penalized on your credit. If you are looking to obtain a mortgage, for example, and you want to check with 3 different lenders to get a feel for what they may offer you, you can have each of them pull a credit report for you. If all three of these lenders pull the report within a 30 day time period your score will only include one inquiry as part of your calculated score. The impact only occurs when the time between inquiries is greater than 30 days or in a different type of debt.
Let’s continue with the idea of shopping for a mortgage. If one lender pulls your credit on Nov 7, 2008 and your score is 685 and then another lender, just 10 days later pulls your score, it would seem that since your credit was pulled within that 30 day window your score would not be impacted, right? Well, that is correct when it comes to calculating in the inquiry, but things change daily, if not hourly on your credit report. The inquiry wont impact your score, but the changes to your credit will. You could have a score of 653 or even 702, but that will be due to the other factors associated with your score. Items such as an increased balance on a credit card, or a late payment will impact your score, but the inquiry did not. So, don’t be upset with the lender who pulls your credit report and tells you a different score. It isn’t due to the inquiry, but rather the changes on your report from your creditors reporting new information.
If you want some more info directly from the credit bureau themselves, check out http://www.myfico.com/CreditEducation/CreditInquiries.aspx.
Scott
Thank you for the explanation. I had no idea how my credit score was calculated. It was very helpful.
All information contained in this post is 100% original and written from our knowledge of the mortgage business and our direct experience as mortgage lenders.