"Will Running My Credit Lower My Score?"
"Will running my credit lower my score?"
I hear this question all the time. Naturally, it’s the buyer or borrower who’s asking and who has been told that by simply making a credit inquiry for a mortgage loan, his or her FICO (Fair, Isaac and Co.) score will be damaged. Too often and unfortunately, this myth is propagated by lenders who would prefer that their potential clients do not shop further for their mortgage needs.
But what is the correct answer to the question? Of course, it depends on the situation.
When you apply for a mortgage, your loan professional will obtain a mortgage-related credit report. This type of inquiry differs from other consumer credit reports (auto, credit card, etc.) and from the "soft pull" credit monitoring services to which some individuals subscribe. For lending purposes, and depending on the three credit repositories; Equifax, Experian and Transunion, scores will range from 300 to 850, with the higher numbers representing an excellent credit rating. Note that it is extremely rare that anyone ever scores a "perfect" on the FICO test, so don’t be too alarmed if you don’t either!
A key concept to note is that when shopping for a mortgage in a condensed window of time (several weeks), multiple credit inquires often impact the overall score as if it were a single inquiry. The FICO model realizes that shopping for the best mortgage is not inconsistent with smart and effective consumer behavior. The pie chart below shows what’s in a FICO score and it is evident that the inquiry component alone reaches only 10% of a borrower’s total.
Now that we’ve identified the percentage related to new credit inquiries, let’s also cover the balance of characteristics that make up the whole credit profile. Not surprisingly, 35% of any FICO score is derived from payment history. Over the course of a credit user’s financial life, have obligations been paid on time and according to term? If so, more than a third of the total score is satisfactory. Next are amounts owed, or "balance to limit." Less credit risk is associated with sufficient availability of credit that is not "maxed out." For example, if a credit card user has a $10K limit, and routinely charges balances up to $9900, this will be viewed less favorably than if the same card carrier charged only $500 --- even if both balances are paid on time and in full.
The final third of any credit score is derived from length of history (15%), blend of credit used (10%), and new credit/inquiries, as covered above. When talking about credit history, it is important to note that when borrowers take matters into their own hands, "cut up" their credit cards and cancel unused accounts, they may effectively be sabotaging their own credit history. Of course, most do this unknowingly, but it highlights the fact that when it comes to credit scores --- especially as they relate to your mortgage needs --- it is vital to seek the advice of a professional. I am here to assist you with your credit-related questions and concerns at any time.