Thursday, September 9, 2010

Credit Inquiries – Do they affect your FICO Score?
It has been a while since I last addressed the subject of Inquiries. It seems there are always endless questions and confusion surrounding this topic. What is an Inquiry? An Inquiry is when a consumer's credit is reviewed by a lender, creditor, or by the consumer personally. Inquiries remain on the credit report for two years. Some types of inquiries will hurt credit scores, while others won't affect them at all. This seems to be where the most confusion comes into play.

When a third party pulls credit with the consumer's authorization this inquiry will negatively affect the credit score. This type of inquiry is called a "hard pull". On the other hand, if a creditor pulls credit without authorization (for example, to consider a consumer for a promotional 2% credit card offer), it is considered a "soft pull." A soft pull is an inquiry that does not negatively impact the credit score. But suppose the consumer applies for the promotional 2% credit card? The creditor will then undertake a more in-depth review, this time with authorization. This will be considered a hard pull, reducing the score.

To understand inquiries we must look at scores as well. We will take the FICO Score as an example. The FICO Score is used by mortgage lenders when deciding a consumer's risk level. Based on the risk level, lenders decide what interest rate is appropriate for a loan -- or if a loan will be approved at all. When lenders pull FICO Scores it is considered a hard inquiry and will hurt the credit score. But FICO also sells scores directly to the general public online at Ordering your score and credit report directly from this site will not affect your score. In fact, even if a consumer pulled his credit and scores 80 times in one day at, all 80 pulls would be considered "soft" and would not affect the score. Consumers can also obtain their credit directly at other online sites, such as,,, etc. without hurting their FICO score.

This is how FICO defines the effects of inquiries:

"The impact from applying for credit will vary from person to person based on their unique credit histories. In general, credit inquiries have a small impact on one's FICO score. For most people, one additional credit inquiry will take less than five points off their FICO score. For perspective, the full range for FICO scores is 300-850. Inquiries can have a greater impact if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk. Statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports. While inquiries often can play a part in assessing risk, they play a minor part. Much more important factors for your score are how timely you pay your bills and your overall debt burden as indicated on your credit report." **

Fico speaks about the five points as if they were insignificant. But five points at a 740 or 720 FICO score can make a big difference in interest rates, which could equate to a considerable amount of interest over the life of the mortgage depending on the size and life of a loan. It is essential to think about timing when you manage your credit. Timing is everything. If a consumer is planning on applying for a mortgage within one - two years, every action that could affect their credit score should be weighed by the impact it will have on that loan. Since a home is one of the largest purchases a consumer will make in their lifetime, and the mortgage will be one of their largest monthly payments, it only makes sense to try to get the best interest rate and make the lowest monthly payment possible. With this in mind we must understand how different inquiries happening at various times change a consumer's scores.

When lenders pull credit scores through their pulling service (a third party between the bank and the credit reporting agencies - Experian, Trans Union, and Equifax) they are given merged reports that come in a format of the bank's choosing. What most people and bankers may not realize is that each bank chooses what "window" they will use to decide the effect of inquiries. The window is defined as the time period the consumer has been allotted to shop for a mortgage loan, car loan or lease, or student loan, without each inquiry reducing their credit score. During this window they can have 10, 20, or even 60 inquiries and it will only affect the score as if it was one inquiry (or hard pull). This applies only to the three loan types mentioned above, and each group is considered separately in batches of inquiries.

For example: Brian was shopping for the best rate on a mortgage. He went to Bank of America on August 1st , Wells Fargo on August 3rd, HSBC on August 12th, and M&T on August 16th. All of these banks had a 14 day window that they allowed for inquiries to be viewed as one in batches. The three inquiries within the 14 day period only reduced Brian's score by 4-5 points but the inquiry that occurred on the 16th day, which was past the 14 day window, decreased his score another 4-5 points. Brian's score was a 725 when he began and by the time he decided he wanted to get the loan 2 months later, after having his credit pulled yet again, his score was down to a 710. Brian could not get the type of loan he originally wanted because of the lowered score. He wound up paying more for the loan but he was lucky because he could have been turned down completely.

Most banks used to have 30 day windows but when the economy changed they became more restrictive on lending money. Reducing the window reflects the banks' more conservative posture.

Now getting back to Brian: If we take the same situation as the above but we have Brian shopping for a car at the same time it would look like this: Brian went to a Toyota dealer, a Lexus dealer, and an Acura dealer looking for a car loan on August 5th, 10th, and 14th. This would only have reduced his score another 4-5 points since it was done within the14 day window. But if he also increased his spending limit at Macy's on August 9th that would reduce his score another 5 points. Now we are talking about a 700 score. This is a major change in score and could make a huge difference in his loan rate.

To be clear, then: Each grouping (or batch) of inquiries for a car, student loan, or mortgage is considered as one single inquiry per group, as long as they are performed within the allotted window. Any other hard pulls during the window, such as for an increase in spending limits or to open new credit, are never viewed in batches and always reduce the score individually.

Once empowered with an understanding of how inquiries can decrease their scores, and the art of timing when shopping for loans, consumers have the power to make a big difference in their financial lives.

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