For the past few weeks we have been talking about credit, the ins and outs of it all. This is our last installment in the credit series. I hope that it has been informative and has given you a basic but thorough understanding of how credit works and how you can be diligent in maintaining your optimal score.
I know that you have heard about creditors checking your credit and how it can possibly lower your score. There are two different types of credit inquiries, soft inquiries and hard inquiries. I will explain both in just a moment. An inquiry is posted to your credit report every time an individual or a business reviews or obtains a copy of your credit report, but a potential lender only sees the hard inquiries. As we learned in the early part of this series, 10% of your credit score considers the numbers of inquiries made to your credit report. So it just makes sense to limit the number of times that your credit report is pulled.
The Fair Credit Reporting Act (FCRA) requires businesses to have a legitimate reason for accessing your credit report. Acceptable reasons include: to grant credit, collect a debt, underwrite insurance, employment, license issuing by some government agencies and legitimate business transactions. If a company obtains your credit report under false pretenses or uses it improperly this is considered a violation of federal law.
Not all inquiries that appear on your credit report affect your credit score. Inquiries that are made because of an application you made for credit are the ones that affect your score. These are the ones that are called the hard inquiries. A soft inquiry is when a company pulls your credit to send you a promotional offer. We all receive offers in the mail telling us that we have been pre-approved for a car, credit card or furniture. Those are soft inquiries and lenders do not see them when they pull your credit; only you are privy to those pulls. Soft inquiries are also the inquiries made by employers, businesses you already do business with and you yourself.
Inquiries on your credit report can indicate your risk as a borrower. Too many inquiries might mean that you are taking on too much debt or that you’re in some kind of financial trouble and are looking for credit to help you out. Several inquiries can reduce your score. Depending on how much information you have on your credit report, an additional inquiry may not affect your score. On the other hand, if you have a short credit history without a lot of accounts, an additional inquiry could cause your score to drop by a few points.
Credit report inquiries will remain on your credit report for 2 years, but only those made in the last year are included in your credit score calculation. The most recent inquiries have the most effect on your score.
When you are shopping around for mortgage and auto loans, it is understandable that you want to obtain the best rate and you should. Don’t worry that having your credit checked by several lenders could hurt your score, because most credit scoring calculations treat all mortgage and auto inquiries as a single inquiry, as long as the inquiries are made within a 45 day period.
If you have any further questions pertaining to credit, feel free to comment below or contact me personally. Thanks for reading!