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Article: "Do Inquiries Affect My
Credit"
By Andre Plessis
What is a credit inquiry?
A credit inquiry is an item on a credit
report that shows a business with a "permissible purpose" (as defined under the
federal Fair Credit Reporting Act) has previously requested a copy of the
report.
Not all inquiries count toward your
FICO score.
When you check your credit report, you may
notice that a number of credit inquiries have been made, sometimes from
businesses that you don’t even know. But the only inquiries that count toward your
FICO score are the ones that result from your applications for new credit.
Inquiries that count toward your FICO score.
There is only one type of credit inquiry that counts toward your FICO score.
When you apply for a mortgage, auto loan or other credit, you authorize the
lender to request a copy of your credit report. These types of inquiries,
prompted by your own actions, appear on your credit report and are included in
your FICO score.
Inquiries that don’t count toward your FICO score.
Your own credit report requests, credit checks made by businesses to offer you
goods or services, or inquiries made by businesses with whom you already have
a credit account do not count toward your FICO score. Credit checks by
prospective employers also do not count. These types of inquiries may appear
on your credit report, but they are not included in your FICO score.
Your FICO score is not affected when
you check your credit.
Checking your credit reports regularly to be
sure they are accurate and error-free is a good idea. In fact, maintaining
accurate credit reports is a part of good credit management, which can help to
improve your FICO scores over time.
How inquiries are factored into FICO
scores.
There are 5 types of information used to
calculate a FICO score at any given point in time. Each type of information
counts as a percentage of a total FICO score:
Payment history
= 35%
Amounts owed
= 30%
Length of credit history
= 15%
New credit
= 10%
Types of credit in use
= 10%
These percentages are based on the importance
of the five categories for the general population. For particular groups, such
as people with relatively short credit histories, the importance of the
categories may differ.
Inquiries are a subset of the "new credit"
category shown above, which accounts for 10% of the total FICO score. Their
importance depends on the overall information in your credit report. For some
people, a given factor may be more important than for someone else with a
different credit history. In addition, as the information in your credit report
changes, so does the importance of any factor in determining your score. What's
important is the mix of information, which varies from person to person, and for
any one person over time.
Inquiries may or may not affect your
FICO score.
A FICO score takes into account only
voluntary inquiries that result from your application for credit. The
information about inquiries that can be factored into your FICO score includes:
Number of recently opened accounts, and
proportion of accounts that are recently opened, by type of account.
Number of recent credit inquiries.
Time since recent account opening(s), by
type of account.
Time since credit inquiry(ies).
A FICO score does not take into account any
involuntary inquiries made by businesses with whom you did not apply for credit,
inquiries from employers, or your own requests to see your credit report.
For many people, one additional credit
inquiry (voluntary and initiated by an application for credit) may not affect
their FICO score at all. For others, one additional inquiry would take less than
5 points off their FICO score.
Inquiries can have a greater impact, however,
if you have few accounts or a short credit history. Large numbers of inquiries
also mean greater risk: People with 6 inquiries or more on their credit
reports are eight times more likely to declare bankruptcy than people with no
inquiries on their reports.
What happens when you apply for
credit.
When you apply for credit, you authorize the
lender to ask for a copy of your credit report. This is how voluntary inquiries
appear on your credit report.
The inquiries section of your credit report
contains a list of everyone who accessed your credit report within the last 2
years. The report you see lists both voluntary inquiries, spurred by your own
requests for credit, and involuntary inquiries, such as when lenders order your
credit report to offer you a pre-approved credit card.
Will my FICO score drop if I apply
for new credit?
If it does, it probably won't drop very much. If
you apply for several credit cards within a short period of time, multiple
inquiries will appear on your report. Looking for new credit can equate with
higher risk, but most credit scores are not affected by multiple inquiries from
auto or mortgage lenders within a short period of time. Typically, these are
treated as a single inquiry and will have little impact on the credit score.
What to know about "rate shopping."
Looking for a mortgage or any other loan may
cause multiple lenders to request your credit report, even though you’re only
looking for one loan. To compensate for this, the score counts multiple auto or
mortgage inquiries in any 14-day period as just one inquiry. In addition, the
score ignores all mortgage and auto inquiries made in the 30 days prior to
scoring. So if you find a loan within 30 days, the inquiries won't affect your
score while you're rate shopping.
Improving your FICO score.
If you need a loan, do your rate shopping
within a focused period of time, such as 30 days or less. FICO scores distinguish
between a search for a single loan and a search for many new credit lines, in
part by the length of time over which inquiries occur.
Andre Plessis
Andre Plessis "The Mortgage Guru"
"A Mortgage Professional
whose primary goal is to provide the expertise, guidance and skills necessary to
obtain the best mortgage to meet your personal needs".
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