WHY CREDIT INQUIRIES CAN REALLY HARM YOU?

WHY CREDIT INQUIRIES CAN REALLY HARM YOU?

Have you ever had a client that is purchasing a home start doing credit inquiries during the transaction and next thing you their score is 25 to 50 points lower?

Do you want to know why credit inquiries affect your score so much? Read on.

Every day I’m confronted by one of my client about how they just applied for a credit card, car, mortgage or just about any credit inquiry that you can think of. The thing I tell them is that on our first credit coaching discussion I let them know not to do any inquiry without first pulling your score online and seeing what all 3 of your scores are. Next, I have them ask the creditor what is the qualifying score for their program, if their score is high enough they can let the creditor pull their credit, if it is too low the client should not apply.

Each day we receive credit offers for everything form cars to lower interest rates and none of these offers means you really qualify for them or pursue the indebtedness whatsoever. Don’t give into the marketing hype, “You are Pre-Approved for $25,000”, yes and you could also “Already Be a $1mm Winner”.

Regardless of the reason you respond to a credit offer, maybe a special occasion, an emergency, a once in a lifetime opportunity, you should always be aware that credit companies will immediately run a credit inquiry which may cause you, depending on your circumstances, to lose between 5 and 50+ points from your score.

Here’s what’s happening:

According to Fair Isaac & Company, the creator of the credit scoring model, the very process of applying for new credit makes up 10% of your credit score. For most people, this factor is one of the least understood aspects of the scoring system, and most of us have no idea how to protect ourselves. Therefore, let’s break it down.

There are two types of inquiries that you need to know about—soft inquiries and hard inquiries. Here’s the difference:

Soft Inquiries do NOT affect your credit score. Here are some examples of what would be considered soft inquiries:

• When YOU pull your own credit
• When one of your existing creditors does a periodic review of your credit. This is called an account review
• When a creditor has purchased your name from the credit bureaus for the purposes of sending you some sort of credit solicitation in the mail. This is called a promotional inquiry
• When an employer checks your credit before hiring you
• When you apply for auto insurance
• When a landlord checks your credit

Hard Inquiries DO affect your score. A hard inquiry occurs when you apply for a loan, a credit card, or any type of credit. Here are some examples of what can cause a hard inquiry to show up on your credit report:

Applying for:

• a mortgage or home equity line of credit
• an auto loan
• a credit card
• credit on the internet
• a student loan
• pre-approved” credit offers you receive in the mail
• “instant credit” offers when you are at the shopping malls

Why do creditors even care about this?

You may be wondering why this information matters to your credit score. From a creditor’s point of view, consumers who are actively looking for credit, or have “excessively” shopped for credit in the past 12 months, are generally a higher credit risk than consumers who have not. In addition, the potential creditor has no idea that those inquiries have not resulted in a recent loan which could disqualify you from being approved.

Statistical studies also show that multiple inquiries can often be associated with a high risk of default and that distressed borrowers who are desperate for assistance are known to contact many lenders in hopes of finding someone who will approve them, whether they can afford the new credit line or not.

So How Can You Shop For Credit Without Hurting Your Score?

The good news is that Fair Isaac realized that consumer's shouldn't be penalized for something as logical as shopping around for the best interest rates before making buying a car or home, so they came up with something called De-Duplication. What it means is this.... Consumers can have their credit pulled by as many mortgage or auto lenders as they want within a 14 day period, and it will only be counted as one hard inquiry against their score. And even better news is that the new scoring model released by FICO has expanded the 14-day period to 45 days. Note: Not all lenders are using the new model yet, so it is best to be safe and do your shopping in a 14-day period.

SUMMARY: What you need to know

• Hard inquiries will remain on your report for two years, but will only affect your score for one year
• Hard Inquiries can cost anywhere from 3 to 50+ points. It all depends on how the rest of your factors are being managed. If you have a score below 640, an inquiry will cost you more points than someone with a 720 score
• Multiple auto or mortgage inquiries in any 14-day period are counted as just one inquiry
• The credit scoring system DOES NOT like third party credit card inquiries (i.e. Nordstums, Circuit City, etc.), so avoid discount offers from department stores. Saving 10% on your first purchase is probably not worth the credit hit
• Finally, keep in mind that when you receive unsolicited mail that says, “You are Pre-Approved,” it does NOT mean you are pre-approved. As soon as you pick up the phone to call the creditor, they will pull credit and your score will go down immediately. Note: Inquiries for promotional cards are considered especially negative because it appears that the consumer is desperate.

How to Dispute Inquiries

In light of what we have discussed, it would be a good idea to check your credit report in order to unveil the impact of credit inquiries on your score.

Step 1 - Order Your Credit Reports & Scores
Order your credit report and score for all three national credit bureaus, Equifax,TransUnion and Experian. You should get your score from all three bureaus for two reasons. Each bureau may have slightly different information about you depending on which companies have reported to them on your accounts. Many lenders, especially mortgage lenders, look at all three of your FICO scores to determine whether to grant credit for everything from a car loan to a home loan to a credit card to a cell phone. Do not have a creditor pull your reports because you will lose points for a hard inquiry.

You can pull all three credit reports and scores from myfico.com, one of the three credit bureaus, or www.privacyguard.com. Please be sure to read terms and conditions of the Agreement.

Step 2- Verify the Data Being Reported About YOU
It is the consumer's responsibility to verify that the data being reported is accurate. Look toward the end of your credit report to find the inquiries that are being reported. If there are inquiries that you do not remember authorizing, then go to the next step.

Step 3- Dispute the Inaccurately Reported Information Immediately
Find the creditor address and contact information for each inquiry that you do not recognize. If you are unsure of whether or not it is a soft or hard inquiry, dispute it anyway. You have nothing to lose.

Conclusion:

It’s very important that you understand every aspect of your credit report. As you know now, new credit accounts for 10% of your credit score, and hard inquiries, which we now understand, is considered a component of the new credit quotient. Even though 10% sounds like a small number, it can become a very big deal, a huge deal, when it prevents us from obtaining the credit we need.

Your credit is not going to magically get better and the credit bureaus our not watching out for your best interests, so you must be proactive and take action even on what seems to be a small issue, small issues can end up being big problems when qualifying for a loan.

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Mission: We educate and coach people looking to improve their credit score and overall financial health so they are able to learn financial disciplines and achieve a more secure future.

Vision: To raise the standard of living for all people and inspire them to live their passions and dreams and have piece of mind.