A primer on credit bureau inquiries
How Inquiries Affect Your Credit Score
Credit bureau “hard” inquiries have a small negative effect on your credit score for a period of 1 year from the date they are made. The loss is often said to be about 5 points for the average credit score. The exact amount of the harm depends to a great extent on where your score was to begin with. FICO’s web site says that 1 Inquiry has “little to no effect on the average credit score.”
A higher score will lose more than a lower score because there is more of it to lose. A “soft” inquiry is an inquiry made by a prospective employer, landlord or credit card company looking for people to send pre-screened offers to. Soft inquiries or any number of your own inquiries do not affect your score at all. Inquiries affect your credit score only when they allow a lender to make a loan or assess whether or not you are credit worthy. Hard inquiries can only be made by those with “legitimate business needs.” Inquiries affect your credit score only on the report of the bureau that the lender checked.
Inquiries Stay on the Report for 2 Years but only Hurt Your score for 1 Year
Don’t get upset when you see inquiries past the 12 month mark. Inquiries affect your credit score to FICO not at all as of day 366. FAKO free scoring sites can be misleading as they count inquiries for 2 years. Lenders do not generally use the FAKO educational credit scores. Of course a lender can see these inquiries when assessing factors other than your score.
Multiple Inquiries for Mortgages or Cars Within 45 Days Count as One
Each lending industry has a code used by the credit reporting agencies identifying what type of industry it is. This holds true for credit cards, mortgages, car loans and more. All of the inquiries within the industry code for mortgages or car loans are collapsed into 1 inquiry for that 45 day period. This is only fair because it is obvious that the consumer is simply shopping around for 1 loan. FICO ignores the inquiry for the first 30 days. Industry professionals refer to this as the “buffer” or “safe harbor.” After the next 15 days have passed the total of 45 days is the period of time used as 1 score. This is true regardless of how many inquiries were made for that industry code. If you want to get really wonkish about it this means that the period of time in which the Inquiry does its damage is really 11 months instead of 1 Year!
Don’t Obsess Over how Inquiries Affect your Credit Score
I and other credit score professionals feel that consumers give more worry to inquiries than they warrant. This feeling is universal among credit professionals. Remember that inquiries represent only 10% of your credit score. Remember also that the negative effect really doesn’t last that long. Remember also that it is usually only affecting 1 of your 3 credit scores. This does not mean you should allow inquiries for credit you don’t need. To put it in perspective that new account you want will lower the average age of your accounts. Average age counts for 15% of your score. Average age also has a long lasting effect. The age effect remains long after the inquiries effect has disappeared. Yet people seem to worry more about how inquiries affect your credit score than the effect opening a new account has on the average age. If you can it is much more beneficial to get a credit limit increase than to get your new credit through a new account.
Inquiries are known as “The Fifth Factor” by credit scoring professionals reflecting their position as the least important credit scoring factor. Since credit offers are usually ranked in plateaus of scoring range a single point can sometimes make the difference in whether or not a consumer makes the cut to get the loan at all or to get a better rate.
Should I Opt Out of Pre-Screened Credit Card Offers?
If you wish to opt out of pre-screened offers you can call 888-5 OPTOUT to opt out for 2 years or go to www.optoutprescreen.com. This site allows you to choose the length of time you wish to opt out for. If you want to lighten up your junk mail you can do this. Your score is not affected one way or the other regarding whether or not you choose to opt out.