THE BEST DETAILS ON THE IMPACT OF CREDIT INQUIRIES!

The Truth.....Then the Whole Truth About the Impact of Credit Inquiries on Credit Scores

This subject matter is probably the most common or frequent question I receive from borrower's and even Realtors. As such, I believe it is important to dispel certain myths about the negative impact of credit inquiries on the credit scores contained in each consumer's credit file by providing you with information, facts and answers so that you may better serve and educate your clients.

Do multiple inquiries into a borrower's credit file serve to lower their credit scores?  Answer is YES it can, ...... but not necessarily!  The primary myth on this subject matter is the half or partial truth which is frequently used by unscrupulous loan officers/mortgage brokers that will choose to use this myth as a scare tactic to enhance their personal advantage depending on how they choose to explain the impact of credit inquiries to the prospective client. They frequently will tell the truth......but not the WHOLE TRUTH in cautioning borrowers to not allow additional lenders to pull their credit report. They believe that this tactic will deter the prospective borrower from further shopping for their mortgage loan thereby increasing the probability that they will get the deal!

Background:

First and foremost, it is important to understand that credit scores are not a measure of past credit performance.  They are a predictor of the likelihood or probability that the consumer will experience financial problems in the future such as late payments, default, bankruptcy, etc.  The lower the credit score the greater the probability of credit issues happening. As such, the credit industry has evolved to the point where the credit score is the "key" element in assessing the risk of doing business with a consumer.

Businesses that extend credit to consumers and pull consumer credit reports as part of their decision to extend credit are users of this information. Every business by type (mortgage lender, consumer finance, credit card, auto dealers, insurance company, retailer, etc.) is assigned a subscriber code which tells the credit bureau agency what type of user is making the credit inquiry. In years past it was very common for some users to "shotgun" a consumer's application for credit to several lenders simultaneously (most prevalently the auto dealer).  Their intent was to get the fastest possible credit decision/approval on their client as well as create competition for their business. Obviously, this process served to exacerbate the credit scores of the consumer due to excessive credit inquiries.

The risk scoring models used by the credit bureau agencies are closely guarded secrets! Every consumer credit file is unique unto itself. There are scores of factors which are considered and weighted against other file data which determines the credit score of a given consumer. These models are risk assessments that have been developed and refined over many years using the data contained in millions and millions of credit files. No person, that you or I will ever know, can accurately state the negative impact of inquiries or even other adverse information on a borrowers credit score. This impact is entirely relative to the overall content and quality of the borrower's credit file. Although, excessive inquiries over some specified time frames will serve to lower a consumer's credit score. Repeated inquiries or applications for the extension of credit is viewed as a risk in that the consumer may be incurring additional debt which will serve to degrade their overall creditworthiness

A few years ago the credit bureau agencies finally recognized that when consumers were having multiple inquiries into their credit files by specific users and specific subscriber codes (such as mortgage lenders) that these consumers were not in fact attempting to open several new accounts but rather that they were shopping for services in an effort to obtain the best services and/or terms that they could find. As such, they should not be unfairly penalized with reductions in their credit scores and thereby suggesting that they were becoming more of a credit risk. The credit industry instituted a policy that would allow for a period of time (fourteen 14 days) of increased inquiry activity (by subscriber code) without undue or negative impact on the consumer's credit score giving more flexibility to consumers to shop for their mortgage loan without fear of losing points in their credit score. If a prospective borrower shops for their mortgage loan for an extended period of time allowing numerous lenders to pull their credit report and even have an occasional inquiry for other purposes such as credit cards or auto loan then the consumer's file will most likely suffer a reduction in credit score.

Consumers looking to obtain a mortgage loan (purchase or refinance) should be educated to only start the shopping process after making a personal commitment to complete their transaction in the very near term, preferably within 90 days and the sooner the better (30-60 days). To start and stop and restart the process over an extended period of time will serve to exacerbate their credit scores and possibly do themselves a dis-service by qualifying for a less desirable mortgage program or possibly not qualifying at all.

Also, it would be useful to know that lenders, as a rule, qualify borrower(s) based on what they refer to as a representative score.  This score is the middle score of three (3) scores in the borrowers credit file. Where there are only two scores the representative score is the lower of the two.  In cases where there is a co-borrower, the representative score becomes the middle score of the primary wage earner.