Your credit score is an important part of getting a loan, credit card, or a mortgage. So naturally, you want to ensure that your credit score is healthy so you can get access to all of these things without any issue. But there are many misconceptions regarding whether a credit inquiry can affect your credit score and impact your number. When you’ve worked hard to maintain good credit, the last thing you want is for your credit score to be impacted by something as insignificant as a credit inquiry from a lender. So let us set the record straight for you. Myth or fact – does a credit inquiry affect your credit score?
How It Works
When you apply for credit, you authorize the lenders to pull a copy of your credit report from a credit bureau. How your credit score is impacted depends on the type of credit you’re applying for. For instance, if you’re applying for a mortgage, student loan, or auto loan, these will be treated as a single inquiry and have little impact on your score. It’s when you start applying for new credit that red flags get set off.
How your Credit Can Be Impacted
If you open several credit accounts in a brief period of time, this can impact your credit score. The action of applying for numerous credit instruments indicates that you’re in need of credit as opposed to just “rate” shopping. The impact this will have depends on your credit history, but a large number of inquiries will pose a greater risk. This is because people who have large inquiries are more likely to declare bankruptcy. However, those who have a good credit history and are looking for one additional inquiry will have a very low potential reduction, if none at all.
Exceptions to The Rule
If you pay your bills in a timely fashion and your overall debt burden is low, you will be at a limited risk of an impacted FICO score. Rate shopping is also treated much differently as mentioned above. When you’re looking for a mortgage, auto, or student loan you can have multiple lenders requesting your credit report even though you are only seeking one loan. FICO compensates for this and ignores these types of loans made in the 30 days prior to scoring. So if you find a loan within the 30-day time period, FICO won’t penalize you. The newest version of scoring usually uses a 45-day span shopping period.
If you pay your bills on time, keep your balances low, and only apply for new accounts when you really need them, then you shouldn’t be concerned about a credit inquiry affecting your credit score. If you have any questions or concerns, Financial Forum is here to help! Reach out to us today to learn more about your credit score.