Know Your Credit Score New Credit Inquiries

Know Your Credit Score New Credit Inquiries Know Your Credit Score: New Credit Inquiries Know Your Credit Score: New Credit InquiriesIn the final post of this five-part series, we cover your new credit inquiries and how hard checks and softs checks will affect your score differently.So far in this series, we’ve covered how your amounts owed, payment history, credit mix, and the length of your credit history can impact your FICO Score. Today, we’re covering the final category of info that makes up your score: your new credit inquiries.Let’s get started!What is a credit inquiry?Basically, a credit inquiry occurs anytime a request is made to access your credit report. If you request a copy of your report or you apply for a loan, both will result in credit inquiries noted on the report itself. Credit inquiries are also sometimes referred to as “credit pulls.”Your new credit inquiries and your credit mix are the least important parts of your score as each only makes up 10 percent of your total. For comparison, your payment history and your amounts owed combine to ma ke up 65 percent of your score.But that doesn’t mean that your credit inquiries aren’t important. When there are so few factors making up your score, everything is important. And the most important thing to know when it comes to credit inquiries is that not all kinds of inquiries are created equal.“There are two types of credit inquiries: soft inquiries and hard inquiries,” says attorney Stephen Lesavich, Ph.D., (@SLesavich), best-selling author of The Plastic Effect. “Soft inquiries do not affect your credit score. Hard inquiries have a direct effect on your credit score.”Here’s why soft inquiries won’t affect your score.The basic point of a tracking new credit inquiries is so that lenders know when you are applying for a new loan or credit card. If they see a bunch of recent inquiries, it could mean that you’re desperate for more credit, which means that you’re a higher lending risk.But not all credit inquiries come about from loan applications, which is why so ft inquiries don’t affect your score.According to Lesavich, “Soft inquiries or soft pulls include such events as a person checking their own credit score and the creation of list inquiries by credit card companies, mortgage companies, etc., to create lists of pre-approved applicants”“Credit card companies routinely buy lists of potential customers from the three major credit reporting bureaus. The credit card companies use the lists and other demographic information to target individuals that meet a desired credit score level, income level, or other desired threshold criteria.“Typically, the individuals on the lists are then targeted in a mass mailing with a paper application or an application sent electronically (e.g., via e-mail).  Such lists are created with soft pulls that do not affect anyone’s credit scores,” he says.When you check your own report, you can access a full copy and still have the check be recorded as a soft inquiry. On the other hand, when a credit card runs a soft check on your credit, they won’t get all the same information that they’d get with a hard check.If it helps, you can think of hard checks like reading a novel, while soft checks are like reading Cliff’s Notes instead.“A hard inquiry directly affects your credit score and usually causes it to go down,” says Lesavich.Why do hard inquiries lower your credit score?  Hard inquiries are most commonly done when a lender or a credit card company is reviewing your loan application. The lender wants to view your history of using credit, making payments, maintaining low balances, etc.So why do these inquiries cause your score to go down?According to Lesavich, “Credit score scoring rules consider anyone applying for new credit (e.g., a new credit card, loan, or mortgage) to be incurring additional debt. That increases the financial risk associated with extending additional credit or lending money to that person.”“Numerous hard inquiries are also viewed as a pot ential indicator that a person is attempting to expand his/her debt limits, or may be experiencing financial problems, both of which increase the risk that the person may not be able to pay back any additional money lent to him/her,” he says.Lesavich also points out that personal loan and credit card applications are far from the only time that hard credit pulls are made:“Did you know that other common activities also result in hard inquiries that can affect your credit score? Some of these are: getting a new cell phone or changing your cell phone carrier; connecting utilities such as electricity, natural gas, or cable television; switching to a new utility provider; opening a new bank account; opening a trading or retirement account with a broker; signing a lease to rent an apartment; applying for a job and going through a divorce.  Even though most of these entities do not report payments to a credit reporting bureau they still may do a hard inquiry on you before they provide you with the desired goods or services.”There are actually certain types of loans that wont result in a hard credit check. Most often, these are bad credit loans, and certain types of them wont check your ability to repay at all. These are no credit check loans,  a category of products that includes payday loans and title loans. These types of loans can be very dangerous and can trap borrowers into a cycle of predatory debt. If youre going to apply for a bad credit loan, you might want to check out a soft credit check loan instead.While the effect on your score from hard credit inquiries is usually minimal, you should also remember that multiple inquiries within a short period of time can end up lowering your score quite a bit. And as Lesavich puts it, those inquiries could  â€œresult in you either being placed in a higher risk category for which you will pay a higher interest rate, or having your mortgage or loan application denied.”“Hard pulls remain on your credit report for 2 years,” he says. “However, your credit scores are typically only impacted for 12 months after the hard pull.  Each hard pull may lower your credit score by three to five points.”How to shop for a loan with minimal effect on your score.“If you are planning to apply for a mortgage or a loan for a large purchase (e.g., automobile, boat, motorcycle, etc.) in the next one to two years,” says Lesavich, “you should try to limit any activities that result in multiple hard inquiries.”Luckily, Lesavich has some great pieces of advice for how to do this. First, he says that you should find out how many inquiries are involved with each application:“If you are applying for new credit, such as financing for a new car, truck, motorcycle, boat, etc. be aware of how the hard inquiries are conducted.”“For example, if you want to finance a car with a new loan, a first dealer may offer you three different financing options.  You visit another dealer and they also offer you t hree more different financing options.  Or your visit one dealer and you are offered six different financing options.    Are the six different financing options six hard pulls or just one hard pull?  It depends.”Next, he says that you should try and pack your inquiries into as short a span as possible:“Most credit scoring systems count all inquiries for the same purpose (e.g., obtaining a loan for an automobile, etc.) within a given period of time, usually around 14 days, as a single hard pull inquiry.“So if you visited the two dealers within 14 days each with three financing options or the one dealer with six financing options, you would likely only have one hard pull recorded on your credit report.“However, if you visited the two dealers 30+ days apart, you may have more than one hard pull on your credit, one or more from each of the two dealers.”This practice is referred to as “bundling” and it exists to encourage people to shop for credit more wisely. Lastly, Le savich says that you should check how exactly these pulls are being reported:“Be sure to ask how the credit inquiries (i.e., hard pulls) are conducted and reported to the credit reporting bureaus any time you are considering financing options.“If you are shopping for a loan on the Internet on a site that provides comparative financing from multiple parties or multiple financing options, make sure you carefully read the Terms and Conditions and understand how the hard pulls are conducted and reported before conduct your search.”Taking the time to fully read your contract is actually very good advice for any situation. But when it comes to protecting your credit score, it’s advice you should definitely take to heart.Check out the rest of our Know Your Credit Score blog series:Credit ScoresPayment HistoryAmounts OwedLength of Credit HistoryTypes of Credit UsedRecent Credit InquiriesExpand your credit knowledge by checking out these recent credit-related posts:  How fixing your credit can fix your future.  Dose your spouse have bad credit? Heres how it can affect you.  How bad credit can affect your kids future.What kinds of questions do you have about your credit score?  We want to know! You can  email us  or you can find us on  Facebook  and  Twitter.  ContributorsStephen Lesavich, Ph.D., JD,  (@SLesavich) is an attorney, credit card expert, award-winning and best-selling author of  â€œThe Plastic Effect: How Urban Legends Influence the Use and Misuse of Credit Cards”.