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Credit Inquiries: What You Need To Know

Credit Inquiries: What You Need to Know

Credit inquiries also impact your credit score, but how much do they matter?

The world of credit reports and all the factors that do (and do not) impact your score when credit inquiries are made is fraught with pitfalls and misunderstandings. Most Americans only have a vague understanding of how credit works, beyond knowing that a good score means better loan terms and interest rates on everything from credit cards to car and home loans.

But having a basic idea of what factors are considered when assigning a score, and what actions will impact that score, is a critical component of maintaining good financial health. One of those actions is a credit inquiry from a prospective creditor. Before we discuss what you need to know about credit inquiries, let’s take a quick look at how your score is calculated.

credit inquiries can affect your score - but how much?

The Numbers Behind Your Credit Score

Although the exact formula used by FICO to calculate your credit score isn’t public, the agency has shared the broad strokes. Here are the main factors and the relative influence they have on your score:

  • Payment history: 35%
  • Amounts owed/current amount of debt: 30%
  • Length of credit history: 15%
  • New credit/new accounts: 10%
  • Types of credit: 10%

Not surprisingly, making payments on time will have the single biggest impact on your credit score. Missing even a single payment can have a massive negative impact.

On the other hand, length of credit history — how long you have had open credit — isn’t nearly as important as some people believe. In the same vein, opening a lot of accounts just to “build credit” will actually hurt you, as too many new open accounts will actually lower your score.

It’s also important to maintain a good mix of credit accounts. FICO looks for a good mix of credit types, which demonstrates a financially healthy (and thus lower-risk) individual. If all you have is credit card accounts, someone with a similar credit history and at least one installment account will have an advantage.

Hard and Soft Credit Inquiries

Beyond just practicing good financial health, credit inquiries will also impact your credit score. When it comes to credit inquiries, there are two types: soft and hard. Soft inquiries will show up on your credit report, but they won’t actually impact your score one way or the other. These include:

  • Credit checks for pre-approved credit cards or loan offers
  • Checks by prospective employers
  • Individuals checking their own credit history

Hard inquiries, on the other hand, will impact your credit score. And having too many in too short a period of time can have a major impact. These types of inquiries include:

  • Credit card companies in response to a request from you for a new line of credit
  • Auto lenders
  • Home mortgage lenders

Because they affect your score, hard inquiries require your explicit permission to pull. Soft inquiries can be performed without your knowledge. (Think of all the “You’re Approved!” offers you get in the mail.) They can affect your score by as much as five points, and will stay on your credit report for up to two years. (Actual loans, credit card accounts and missed payments stay on your report for up to seven years; bankruptcies and evictions stay for 10.)

One quirk of hard inquiries: If you have several of the same type within a short period of time, usually a week or two, they will only count on your credit report as one inquiry, and will only impact your credit once. For example, if you plan to get a new car, it is best to query all the potential lenders you are considering within a short period of time, when you are actually ready to make the purchase, rather than drag it out over weeks or months. This ensures you get the benefits of shopping around without suffering any negative credit repercussions in the process.

Good credit is the price of entry to the world of better loan terms, better interest rates and better opportunities. Knowing what impacts that score, and what you can do to keep it high is critical in the modern world. Knowing how to manage inquiries to ensure the least amount of impact on your credit profile is a good first step to ensuring your score remains high.

 

Jennifer Bonessi

Jennifer is a blogging mom of three who loves her dusty minivan. "Its the closest thing to a spaceship I'll ever drive!" She writes for IFS and a variety of other niche publications.

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