Although there is an almost unbelievable amount of misinformation concerning inquiries, the actual truth about them is more straight forward than many of the other factors that go into a credit-scoring algorithm.
First of all, a credit inquiry is the name given to the event of someone looking at a credit report. Every time anyone looks at a credit report for any reason, there is a record of that viewing made on the consumer credit report. At the very basic level, those inquiries are broken down into two categories: soft and hard.
Soft inquiries are the ones that are only visible on a consumer credit report, not a mortgage, auto, or any other predictive risk credit report. In this case, a consumer credit report means any report that a consumer pulls for their own purposes, such as checking your score online or pulling the free annual credit report from www.annualcreditreport.com. These inquiries are listed solely to inform the consumer that someone viewed their report and are not, under any circumstances factored into a credit score for lending purposes.
In addition to consumer generated inquiries appearing in the soft inquiry section, other types of inquiries that might appear there include: AR (Account Review) inquires which are views of your credit report initiated by creditors you already have an active relationship with and PRM (Promotional) Inquiries which IS what happens when a company that wants to do business with you but is not currently looking at your report.
It seems appropriate to also note here that there is an incorrect assertion on the World Wide Web that using your right to “Opt-Out” of pre-approved offers through www.optoutprescreen.com will add up to ten points to a FICO based credit score. That is not the case. Any offers you receive for pre-approved credit are done as promotional inquiries and, as such, will not be factored into your credit score. The point of “opting out” is to help protect against identity theft, not improve your credit score.
So, if everything discussed above is a “soft” inquiry, what constitutes a “hard” inquiry? The easiest way to explain it is that any time you actually apply for an extension of credit of any kind, from a payday loan to a mortgage, there will likely be a hard inquiry generated on your credit report. There are some gray areas when it comes to companies such as electric/water utilities, insurance companies, cell phone providers, and satellite/cable companies. Although they could all, under their agreements, pull a hard inquiry, more often than not, they choose to pull a soft inquiry. The next logical question is “How much can a single inquiry impact my score?” Like so many other things, there is a huge gray area here as to the amount an inquiry can influence an individual report. The best way to illustrate this is with a real-life comparison.
Person A has a 720 FICO 2004 credit score. This is because he has a short credit history of around four to five years but a very low balance to limit ratio on his credit cards of 6%. Person B has the exact opposite situation. He has had credit for 25 or more years including many positive accounts, but he also has a very high balance to limit ratio on his credit cards approaching 85%. He, also, has a 720 FICO 2004 credit score. For argument’s sake, let us say that neither of them has applied for credit in the last 2 years (inquiries only stay on a credit report 2 years from the date they were initiated). In the above scenario, Person A might lose one to two points because of the inquiry, or he may lose none. Most risk models would assume that someone would use their available credit before applying for new credit in determining the amount of impact per inquiry. On the other hand, Person B could have an impact of 40 plus points because of that single inquiry. To many people, that may seem like a ludicrously high number for simply applying for credit but there are several reasons why it can be weighted that high.
First, many risk modelers would assume someone with that high of a debt load is either moving debt around instead of paying it or living off credit cards. Secondly, the record of an inquiry does not indicate whether the individual was approved for the line of credit and it can take three or more months for some lenders to first report a credit line to the reporting agencies. Therefore, within plus or minus 90 days, there could be another completely utilized line of credit that has not yet appeared on the credit report. Risk predictors must factor this unknown into the scoring mechanism and it can be a very negative impact. From all of this, it should be clear that when a so called “informative” site tells you that an inquiry always costs 2 points or five points, it cannot be farther from the truth. There are a myriad of factors that go in to calculating the actual impact a hard inquiry has on a credit score.
Finally, another of the most commonly misunderstood factors regarding the impact of inquires on credit scores is the way that inquires for the same purpose impact a score within a given time frame. For example, if you go to get a car and the dealership sends your credit information to fifteen different banks, how much does that affect your credit score? Although there are many different companies that create credit scores, and they can all, in theory, have their own criteria for determining a score, in general there is a specific way that companies choose to score multiple inquiries for the same permissible purpose. For the two most common types of consumer major purposes (houses and cars), as long as the inquires are generated within the same 30-day window, beginning on the date of the first inquiry, all of the inquires will appear in the credit report, but they will only be factored into the credit score as one request for credit. So, even if you go to ten mortgage lenders over three weeks, and they each inquire with four banks, those forty inquires on your report will only impact your score as one inquiry.
All of this might seem like an overly elaborate and confusing methodology, but there are some very basic rules that you can follow to help minimize the impact of inquires on your credit score. First, only apply for credit when you absolutely need to. Next, with the exceptions of autos and home loan, try not to apply for credit more than once in any ninety day time period. Lastly, if you have recently applied for credit, pay close attention to the fees and rates you are charged on any subsequent account applications as they may be highly impacted by the number of inquiries.
Source: James Charlet, CRE Credit Services, member of National Association of Credit Services Organizations (NACSO)
