Ask John: Inquiries 101 - How Applying for Credit Impacts Your Score

Everything you need to know about credit inquiries, including how to minimize the damage they cause to your credit scores.

What exactly is a credit inquiry? A credit inquiry, or “inquiry” for short, are those pesky little notes on your credit report that say when your credit reports were pulled and by whom. An inquiry typically looks like this…

It’s about as innocent looking as you can get, especially for credit report information. But, inquiries can pack quite a score damaging punch if you’re not careful. Inquiries have roughly a 10% influence on your credit scores, which doesn’t sound like much until you start doing the math. Our research has concluded that you can lose as many as 55 points if you bomb in the Inquiry category. The good news is that if you perform flawlessly, you can earn as many as 55 points. Most people will fall somewhere in between.

The low-down on inquiries

The credit bureaus are required to maintain a list of anyone who looks at your credit reports. It’s the law, and they have little discretion in the matter. It’s actually a good thing for you, the consumer. You certainly want and deserve to know who is seeing your credit reports.

The dilemma is that inquiries can lower your credit scores. And, an excessive number of inquires can really hurt. The question that you’re probably asking right now is “Okay, John, so how many is too many? ”  Unfortunately, it’s not that simple. Inquires do not have a fixed value, so it’s impossible to answer that question. Anyone who tells you “inquiries are worth 5 points” (or any other value) is simply throwing a number out there. It doesn’t work that way.

There are two types of inquiries: hard and soft. The terms “hard and soft” are very common credit industry terms but might seem strange to consumers. Here’s what they really mean in English.

The Hard Inquiry – This is the bad type. Whenever you apply for credit with a bank, credit union, finance company, car dealer, credit card issuer, or any other creditor they will likely pull your credit reports and credit scores. And when they do so, the credit bureaus will post the inquiry (just like the one from above) immediately. If they hurt your scores, the damage will begin immediately. Those of you who fell for the “Save 10% off of your purchases today if you sign up for a store credit card” in December are already suffering, whether you know it or not.

These hard inquiries will remain on your credit reports for 24 months. The silver lining is that they will only count against your credit scores for the first 12 months. After that, they will be there for another 12 months but won’t have any impact on your scores.

The Soft Inquiry – This is the not-so-bad type. This is the type of inquiry that is posted for a reason other than you applying for credit. The good news is that these won’t have any impact at all on your credit score. In fact, not only do credit scoring models not see this type of inquiry, but also lenders don’t even see them. You are the only one who can see your soft inquiries.

An example of a soft inquiry is when you ask for a copy of your own credit reports, like through www.annualcreditreport.com. But by far the most common type of soft inquiry is when the credit card issuers buy your name and address from the credit bureaus and mail you those pre-approved credit card offers in the mail. This happens billions (yes, billions) of times each year.

Whenever your name ends up on a list that the credit bureaus sell to a lender, they have to post a soft inquiry when the lender sends you that offer of credit. Don’t panic; remember, those inquiries don’t count against you. Most people have pages of soft inquiries on their credit reports when they see them.

But guess what happens if you sign those credit card offers and mail them back in? That’s right: you’ve applied for credit and have given them permission to pull your credit report. This time it’s a hard inquiry. Read the fine print on the application they mail you. It’s all clearly spelled out in their micro-font. Here’s an Ulzheimer original for you to remember as you read those credit card offers:  The big print giveth and the small print taketh away. In the case of those credit card offers, it’s absolutely true.  
  
The bottom line is that you don’t need to worry about the soft variety because they don’t count against your scores. If you want to get your name taken off of the credit bureaus’ mail lists, you can do so by going to www.optoutprescreen.com. I’ve been opted out for many years and don’t get credit card offers in the mail.

How to Minimize the Negative Impact of Inquiries

Inquiries are very easy to get…and impossible to get rid of. If any of you have ever tried to challenge credit inquiries, you know exactly what I’m talking about. You likely got something back from the credit bureaus that said, “Inquiries are a matter of fact and we cannot remove them.”

There are a few ways to minimize the impact of inquiries to your credit scores. Here are a few of them:

• Don’t use your credit as a “10% off” coupon -- ever. There is never a situation where this is a good idea, no matter how much you saved off of your shopping spree at the mall. You can hurt your scores for the next 12 months, which is long after those leather boots have gone out of style. If you need to refinance your home loan or finance a new car in the next year, it’ll cost you a whole lot more than what you saved.

• Don’t take advantage of “Same as cash” or “No payment for 12 months” deals. Those are what I call “high perceived value, horrible downside” deals. They sound great, don’t they? In this case, they’re too great to be true. Whenever you take advantage of those deals, you are opening a new account, which means a new inquiry. Add to that the fact that you are likely opening an account with a finance company (a potentially score-damaging type of account) that now has a stagnant balance that won’t go down for months or years, and it’s a big loser.

• Shop for the best interest rates for auto and home loans in as short a time frame as possible. There is a pretty cool loophole in the FICO® credit scoring models that give consumers a “free pass” if they want to shop around for auto and mortgage deals. Here’s how it works:

  If an inquiry occurs because you applying for auto or mortgage credit (and yes, FICO knows), for the first 30 days that inquiry won’t count at all. After 30 days pass, the FICO scoring model will look to see if there are other auto or mortgage inquiries. If there are multiple inquiries for those types of loans within a 14-day time frame, those multiple inquiries will only count as one inquiry in your score. There are even newer versions of the FICO scoring software that will count auto and mortgage inquiries within a 45 day period as one inquiry in your score. But, to be safe, do your shopping in a 14 day period. Not all lenders are using the most up-to-date FICO scoring software.

So that’s the skinny on credit inquiries. If you have any further questions about inquiries or anything else to do with credit reporting or credit scoring, please let me know. I can be reached at AskJohn@credit.com .

P.S. – If you want to know how much damage inquiries have caused to your scores, you can estimate it with our Credit Score Compass.

Score Well,

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