Why Inquiries Matter

Why they Matter

New credit is one of the factors used to determine your credit score. In fact, new credit accounts for 10 percent of your credit score.

Hard inquiries are considered a subset of the new credit category.

According to Fair, Isaac & Co., the information about inquiries that can be factored into your FICO score includes:

• the number of recently opened accounts that you have and the proportion of accounts that are recently opened compared with long-standing accounts, by type of account;
• the number of recent inquiries;
• the time since recent account openings, by type of account; and
• the time since you last had any credit inquiries.

As Fair, Isaac & Co. writes on its Web site:

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.

According to Fair, Isaac, people with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports

Auto Loans & Mortgages

That said, the credit industry understands the importance of comparison shopping for auto loans and mortgages. In fact, most lenders want to encourage shopping—since it increases the chance that you’ll give them a try. So, some changes to credit scoring models make in the 1990s and 2000s take into account the likelihood that a smart borrower may generate multiple inquiries along these lines.

Under the FICO scoring model, it doesn’t matter how many inquiries for an auto or home loan that you generate in a 14-day period. They all count as a single inquiry.

What’s more, your score does not include any mortgage or auto loan inquiries that were made in the 30 days prior to scoring. So, you’ve essentially got 44 days to get your act together.

Once you’ve started filling out applications and generating inquiries, remember: The clock is ticking.

Inquiries That Don't Hurt

So-called "soft" inquiries do appear on your credit report, but they do not affect your credit rating.

Soft inquiries include:

• your own requests for your credit report;
• credit checks performed by companies that want to send you a marketing offer;
• inquiries made by lenders or other businesses with which you already have an account; and
• inquiries made by prospective employers.

Also, some middlemen—like credit counselors and loan brokers—may pull your credit. And they may allow several lenders to pull it, too. In most cases, these will all be considered soft inquiries

Credit Card Inquiries

While credit scoring models will cut you some slack when you’re comparison shopping for an auto or home loan, they are not so approving of multiple inquiries from credit card issuers.

One reason: You may have opened one or more credit card accounts within the last month or so, and they wouldn’t appear on your credit report just yet.

And, not to say that you would do so, but some people open a lot of credit card accounts at one time when they’re planning to run up a whole lot of debt—and not pay it back.

On this count, the credit bureau Experian echoes Fair, Isaac’s conclusions:

The more inquiries that appear on a borrower’s credit file, the more likely a borrower may not be able to pay his or her bills as agreed.

Lenders are vague about how many inquiries in what period of time scare them away. But the consensus is that lenders look at credit card inquiries going back six months. If you have six or 10 inquiries in that time period, you could be considered high-risk—even if your score is good.

Inquiries that happened more than six months ago typically are not a concern, since lenders figure you would have opened the account by now, and it would show up on your credit report.

On the other hand, if you do open up several credit card accounts at about the same time, you can be sure you’ll be throwing up some red flags.

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