Whenever you seek credit of any sort including a credit card, an auto loan, or a mortgage, the lending company will most probably request your credit report. This is referred to as a credit inquiry. Multiple requests within a certain span of time may negatively impact your credit standing with the three credit bureaus including Equifax, Experian, and TransUnion. It’s time to consider certain distinctions of inquiries and explore how they affect credit scores in detail.
Hard vs Soft Inquiries
Credit inquiries can also be classified into two broad categories, namely, the hard inquiry and soft inquiry. The hard inquiries are usually made by the lenders when an individual applies for a new credit. These requests appear on your credit reports and can bring your credit score down. Soft inquiries are generally carried out by employers, insurance companies or yourself, and do not damage your credit score.
What Makes an Inquiry too Many?
In general, it is not advisable to have a large number of credit inquiries within a short period because this may show that the borrower has higher credit risk to other lenders. Although a single inquiry has little negative impact on credit scores, multiple ones do. As per the credit scoring models those who make more than six inquiries in a year they are eight times more likely to go bankrupt.
The impact also depends on your credit score before the credit crunch. For instance, a single hard inquiry can demote someone with an exceptional score from 5 points while the same inquiry can reduce someone with a poor score by over fifty points. The more inquiries that are reported to the credit bureau within a short time, the lower the scores will be.
Why Lenders Consider Multiple Inquiries as Negative
There are a few reasons why multiple credit inquiries within a short period lead to lower scores:There are a few reasons why multiple credit inquiries within a short period lead to lower scores:
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Perceived Risk – Multiple credit inquiries may indicate a higher risk that the applicant is in an urgent need for credit because of the existing debts or has experienced some form of hardship. This translates to higher risk.
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Rate Shopping – While it is normal to ‘shop around’ for the best rate on an auto or mortgage loan, too many inquiries look like financial trouble.
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Misuse of credit: If the number of accounts opened is large and within a short span of time, this indicates that the amount of credit that you are using is too huge. This refers to reaching the credit limit.
- New Credit - Multiple inquiries and newly established accounts can decrease the average age of credit history, which is another factor that affects the score.
Inquiries and Credit Scores
However, any hard credit inquiries will be reported on your credit report for 12 months even though the effects decrease overtime. Here’s a general timeline:
0 to 6 months – Maximum influence on credit ratings 6-12 months: Inquiry still on the report but the impact is reduced. 1 year: An inquiry that has been made is struck off the credit report.
The good news, however, is that any score decreases from new inquiries alone tend to be small. Outstanding payments and balances owed, which account for 65% of scores, have the greatest impact on it. As long as you do not apply for too much new credit in a short period, new hard inquiries should not bring your credit scores down.
Ways to Minimize Credit Inquiry Effect
If you are going for a large purchase, such as a house or a car, then your credit shopping over several months will have some scoring effect. But, the effects can be reduced as far as one comprehends the mode of inquiries as well as the planning of applications. Some tips include:
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Inquiries should only be made when need credit hence minimize on the number of inquiries.
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Keep comparisons of rates from lenders within a 30 calendar day period so several inquiries are grouped by scoring models
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Avoid the use of credit card, loans and mortgages that you do not require because they cause low ratings.
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Other than the shopping effects, some of the other positive effects include: Credit history is exceptional; There is always good record of payment; The credit utilization is low.
- The guideline states that no heavy application periods should occur consecutively and there should be at least 12 months between such periods.
Inquire About Rate Inquiry Policies from Lenders
Another way to possibly minimize the amount of inquiries when price comparing mortgages, auto loans, and credit cards is to inquire with the lenders about their rate inquiry policy. Certain lenders may have policies that allow inside inquiries or will not report inquiries made on credit applications under some circumstances.
Summary
Applications do affect credit scores and multiple applications within a short time can be detrimental to the scores. But these effects are not as much as many consumers expect, so long as payments and debts are in good shape. Overall, it is possible to reduce any related declines by not having too many applied-for accounts; comparing rates quickly within a small period; and not having any negative credit history aside from inquiries. Although new inquiries initiate the borrowing process, how you handle new and existing credit counts most.
