Credit Education

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03. Aug, 2016

Credit Inquiries – Who is checking my credit and how does it affect my score?

Credit bureaus calculate their customers’ credit scores with the credit history data lenders and government agencies supply. Everyone understands how defaults, delays in loan repayments, and spending pushes down credit scores. The influence of credit inquires on credit scores is far less obvious. Inquiries set in motion by loan applications are the best known, but credit reports also show inquiries made by a prospective employer or landlord. Sometimes unknown businesses or government agencies ask credit bureaus to supply information on a customer.

A Typical Credit Inquiry Scenario
Let’s look at a situation involving a credit details request. Suppose Mrs. Williams requests a loan from the Bank of Anyplace. The bank needs to know if she is a good credit risk. They want to verify she has means to pay the loan and has a good repayment record with other loans. To check these details, the bank gets permission from Mrs. Williams to open a credit inquiry through the credit bureau. The bank receives a copy of Mrs. William’s credit report and finds out her credit score. When Mrs. Williams gets her credit report, she will see the bank’s inquiry recorded.

How Credit Bureaus View Credit Inquires
The FICO credit score system divides credit inquiries into “hard” and “soft” categories. Hard inquiries come from potential lenders. Only credit inquiries connected to loan applications affect credit scores. The number of inquiries and the time between them also affect credit score calculations. However, the credit bureaus realize people often investigate several credit line options to find the best rates. Bureaus ignore credit inquiries that rate researches generate. For example, they don’t take into account inquires made within 30 days of the credit score calculation.

Soft inquires include customers checking their own credit scores and businesses trying to sell their services. For example, a credit card company looking for new clients may result in a soft inquiry. Soft inquires have no impact on credit score calculations.

When do Credit Inquiries Have the Most Impact on Credit Score?
Why would anyone try to open a succession of credit lines over a short period? It gives the impression that this person is struggling to handle their burden of debt. The more credit debt, the greater the risk of default. Studies show a link between the number of inquiries on a credit report and bankruptcy. One estimate states that someone with more than six credit inquires on their report is eight times more likely to go bankrupt than a person with no inquiries. This is one of the reasons bureaus lower credit scores in these cases. However, much depends on the customer’s broader credit record. Someone with a long positive credit history and a high FICO score is unlikely to find credit inquires damage their score. A customer with a few accounts and a short credit history is likely to see some effect.  

Credit Inquires are Minor Players in the Credit Score Game
For the most part, loan credit inquires have a minor effect on credit scores — the amount of credit the customer uses and other bad credit history items have a bigger impact. At the most, each extra credit inquiry only reduces the customer’s credit score by a few points. On a FICO scale ranging from 300 to 850, a change of a few points makes little difference.

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