Credit inquires are a key component of your overall credit rating. Understanding how they force your score is an important step to achieving a top score.
Credit inquires are a key component of your credit score. You know that too many inquires can hurt your score, but are unsure which inquires impact your score and how much effect they will have. How do your protect yourself from too many inquiries?
Fortunately, no one can pull your credit just because they want to! For example, your best friend cant pull your credit to see if you really paid cash for your new car! Legitimate reasons for pulling credit include:
Issue Credit
Debt Collection
Insurance Underwriting
Licensing
Governmental Licensing
Business Transactions
Even though all of these are legitimate reasons to pull credit, not all of these inquiries will lower your credit score. Only inquires made when you apply for credit will impact your score. These inquires are called hard inquiries.
Soft inquiries, such as when you apply for a license or a new job, do not lower your credit score. It is also important to note that you may pull your own credit as many times as you would like without hurting your credit ranking.
For those inquires that do impact your score, there is no way to pre-determine exactly how much impact they will have. We know that about 10% of your credit score will be determined by what is called new credit. Inquires are a subset of this. However, their overall impact on your score will depend on the information in your credit file.
What is important to understand is that too many inquiries will cause a sharp decrease in your credit score because you appear to be desperately in need of funds. From a lenders perspective, they also get nervous when they see too many inquiries because they have no way of knowing how many accounts you've opened. This makes it very difficult for them to calculate your debt to income ratio with confidence.
What about shopping around for a car or home loan? How can you be a smart consumer and try to find the best rate without tanking your credit score?
At one time, your score would have been damaged even if you were just shopping for a good deal. Luckily, the laws have been changed in your favor.
Auto and mortgage inquires in any 14-day period are now treated as one inquiry. Some lenders follow new guidelines that extend this period to 45-days, but as the lenders can choose which rule they follow, it is best to be safe. furthermore, an inquiry buffer is place on all auto and mortgage inquires within 30 days from scoring. These inquires are ignored.
Understanding how credit inquiries work can help you improve your credit score and get the mortgage approval you are looking for.
