NO. 4 IN A SERIES: An inquiry into credit inquiries
In this issue of The Score, we continue a five-part exploration of the sections of consumer credit reports that have a direct bearing on your credit score, and the relationship between the information they contain and your score. You can (and definitely should) obtain free credit reports once every twelve months at AnnualCreditReport.com.
Reports from the three major credit reporting companies—Equifax, Experian and TransUnion—are formatted differently, but each groups information in similar sections: personal information, accounts activity, public records, and credit inquiries. Although it’s crucial to ensure your personal information is accurate, this series will disregard that issue, as it has no bearing on credit scores. Instead, we’ll consider the other four sections. This installment considers the section on credit inquiries. Parts One and Two of the series examined the account activities section of the report. Part Three looked at the public records section, and Part Five will look at the section that lists collections information.
A credit inquiry is essentially a breadcrumb left behind anytime someone gains access to your credit file. Inquiries are records of who pulled your credit report, and on what date. They are also the only indication in your credit report that someone may be attempting to open new accounts in your name. The possibility that you are considering taking on new debt is what makes the inquiries section of your credit report important to credit scoring systems. (The possibility that someone other than yourself is trying to borrow in your name is a good reason for this section to be important to you.)
Any time you take on additional debt, you are statistically at greater risk of inability to pay your bills. Shopping for and opening new credit accounts, therefore, are indicators of the sort of risk credit scoring models are designed to detect. All other things being equal, someone who has had a number of inquiries on their credit reports is going to be riskier than someone who does not.
The inquiries section of your credit report is divided into two sections.
One section lists inquiries made in connection with new credit applications (known in the industry as hard inquiries). These inquiries can cause a reduction in your credit score.
The other section lists inquiries made for other purposes (soft inquiries). These include score requests you make yourself through free credit-score websites; scores obtained by lenders you have relationships with for account-management purposes; and scores used by lenders to make loan offers to you. Soft inquiries do not impact your credit score.
In terms of managing your credit score, then, hard inquiries are your only concern. It’s important to note, however, that although hard inquiries are indicative of credit risk, they are not among the major drivers of your three-digit credit score. In fact, inquiries are among the factors which have the least influence on your credit scores. So although it’s important to be aware of potential negative impacts of applying for credit, it’s certainly no reason to avoid doing so.
In fact, developers of credit scoring models recognize the importance of shopping for the best terms you can get when applying for credit. Therefore, models employ logic that treats multiple inquiries within a short timeframe as a single event that only impacts your credit score once. For example, the VantageScore credit score considers all inquiries that occur within 14 days of each other as just one inquiry when determining your score. This gives consumers time to shop around for different interest rates—allowing multiple lenders access into their credit reports—without the fear of multiple reductions to their scores.
Because inquiries are among the least influential credit score factors, the number of points by which they’ll reduce your credit score is likely to be modest. It’s not hard to find blogs and stories that equate inquiries to reductions of a specific number of points—5, 10 or 15, for example—but that’s an oversimplification. The impact of an inquiry on your score will vary on a case-by-case basis, depending on the other data in your credit file. Consumers with excellent credit histories may not see any reduction in their scores after an inquiry.
Finally, assuming you continue to pay your bills on time, the impact on your credit score from credit inquiries will be short-lived. Inquiries resulting from credit applications will remain on your credit reports for 24 months, but barring late payments or more serious financial mishaps, your score will typically rebound to pre-inquiry levels within 90 days.