You’ve probably heard that too many credit inquiries can lower you official FICO credit score. But is it true? Do you really know exactly what can affect your scores?
Inquiries can affect your score, but they are grossly misunderstood, maybe more so than anything else in the system. There’s more – much more. What type of loan are you applying for? How often have you applied for certain types of loans in a specific period? Is your lender inputting the correct code of your loan?
FICO, the acronym for Fair Isaac Corporation, creator of the methodology that computes credit scores, suggests borrowers learn a few crucial rules that legislate how inquiries affect would-be borrowers.
To begin, having a large number of inquiries made on your behalf does indeed negatively affect your credit score. Behavioral research has shown FICO that people who inquire too much, who seek too many new credit accounts, are more of a risk. FICO reports that consumers with more than six inquiries on their credit reports are maybe eight times more likely to experience bankruptcy than those with no inquiries.
There are buffer zones, though, so don’t fret if you’re shopping for a mortgage and having five different lenders pull your credit score. For example, FICO will not count any mortgage-related inquiries in the 30 days leading up to the calculation of your score. And all such inquiries in the 45 days before a loan application are deemed only one inquiry. Similar buffer zones include shopping for student loans and car loans. However, there are no buffer zones for other forms of credit, such as for major credit cards or department store cards.
As for just a single inquiry, it usually knocks no more than five points off a credit score. That’s not usually enough to have a negative effect. However, there still can be negative results, despite FICO’s good intentions, especially for first-time homebuyers or young or newly-immigrated people with little or no credit histories.
And the aforementioned wrongly-entered code by a lender when applying for a car loan can adversely affect your credit report. For example, an applicant in Illinois recently was turned down at closing on a pre-approved mortgage loan. Why? Because five new requests for her credit score regarding an auto loan suddenly appeared on her reports when it hadn’t been there when she was pre-approved. The 30 points those credit requests subtracted from her score were enough to drop her below the minimum required for her the mortgage.
What had happened was that loan officers dealing with her auto loans had failed to enter the proper code when inputting their inquiries for her credit reports, even though car loans are in the group of three protected types of loans where multiple requests in a short time are not penalized. Another issue affecting that particular case was that Fannie Mae and Freddie Mac now require lenders to pull credit reports on applicants at closing, even if they’ve been pre-approved, to make sure that their FICO scores haven’t changed dramatically since pre-approval.
Unfortunately, these sorts of glitches are the standard, not the exception. It is strongly recommended that mortgage applicants avoid any and all credit-related shopping – for furniture, home improvements, credit cards, for example – in the weeks leading up to closing on the mortgage. Better to be safe than be sorry.
However, if you’re checking on your own score, which you can do once a year free of charge at www.annualcreditreport.com, your FICO score will be unaffected.