March 27, 2020
This is the final installment of a 5-part series to give you some of the basics about credit. In the previous 4 installments, I covered the first 4 factors that affect your credit score, starting with the ones that have the biggest impact on your scores and moving down the list.
With this last part of the series, I am going to cover the final piece of the puzzle which accounts for 10% of your score. And even though it, along with mix of credit, impacts your score less than all other factors used to come up with your credit score, it sometimes gets more attention than all the others.
This last factor is credit inquiries and new accounts.
Most people don’t talk about the new accounts having an effect on your score. Instead, the main focus is on inquiries even though it probably makes more of a difference in your score to have a new account than it does to have an inquiry.
Simply put, an inquiry means that someone pulled your credit. And yes, it does affect your score when your credit is pulled, but probably not anywhere near the degree one might think if they heard all the commotion about it.
Doing mortgages for over 18 years, I can tell you that I have heard many complaints about having credit pulled. It seems to be more important to some people than getting a loan approved.
In some cases, it becomes a little ridiculous. People are so hesitant about getting their credit pulled that they want a loan approval or a guarantee that their loan can be done before they will allow you to pull their credit. Since the credit plays a big part in getting any loan approval, it has to be pulled before an approval can be given.
So why is there so much attention paid to something that only accounts for 10% of the credit score? There are several reasons this happens.
It is widely known that credit inquiries cause credit scores to drop. Credit repair people tell you that they can remove inquiries to improve your scores. This is only partially true. They can help you challenge inquiries but if you authorized your credit to be pulled, it is very unlikely to have an inquiry removed.
The other credit scoring factors are not well enough known so people latch onto one they feel they can control. After all, no one is allowed to pull your credit without authorization, with some exceptions.
The truth is that while inquiries can hurt your score, they only make up 10% of it and this is combined with new accounts. So when you have your credit pulled and open a new account, your score can be expected to drop a bit. However, there are other factors that can increase your score at the same time and from the same transaction.
Another little known fact is that while inquiries stay on your report for two years, they only affect your score for one year. So if you had your credit pulled 30 times in the last two years but none in the last year, the inquiries will not have any effect on your score.
Earlier, I mentioned there are exceptions to the rule that no one can pull your credit without your authorization. Don’t worry, no one is allowed to do a full inquiry, also referred to as a hard inquiry, without your authorization.
What they can do is called a soft inquiry. This is basically a marketing tactic. The credit bureaus will sell certain parts of your information to those who want to market to you. This is where you will receive pre-approved credit card offers and the like.
Your personal information is not released so your social security number is safe but they do receive enough information to determine that you may be eligible for their offer. Soft inquiries do not have any effect on your score.
Another important thing to know about inquiries is that when you shop for certain items (car loans, mortgages, student loans) inquiries are not all counted the same.
For these types of creditors, all inquiries within either a 14-day period or a 45-day period are counted as if your credit was pulled once. In other words, if you go to a car dealership and they pull your credit to see what you qualify for, you can then go to another dealership the same week and do it again but only have it counted as a single inquiry.
The reason it is 14 days in some situations and 45 days in others is that some creditors don’t use the most updated scoring models. The older models have the 14-day window and the newer models have a 45-day window. Since you won’t know who is using which model, it is best to think with the 14-day window just to be safe.
To illustrate why this is important, I will describe a common scene for someone who is shopping for a car. This example applies to those whose credit scores are not considered perfect. In other words, if you are shopping for a car and your score is below 700, it could apply to you.
A guy goes into a car dealership and finds a car he is interested in buying. After settling on a price, he ends up with the finance manager whose job it is to get him a loan that will work for the buyer and get the dealership the best rebate from the lender.
He pulls credit and sees that it isn’t perfect but still something he can work with so he sends it to a few lenders for them to pull. Pretty soon, the guy’s credit has been pulled 6 times. And if he doesn’t buy right then, instead choosing to check another dealership, the same thing could happen.
Next thing he knows, his credit has been pulled a dozen times. Fortunately, if he does it all within 14 days, it will only count as a single inquiry.
The same thing applies to mortgages. I personally find this to be very helpful because I do mortgages for people who aren’t able to get conventional loans so many of them have gone to another lender and been turned down.
And don’t forget that in order to get credit, you have to have your credit pulled. So instead of focusing on the negative of what could happen if your credit is pulled, do your homework and find out how likely it is that you can get approved before applying for credit. This will help limit the number of inquiries and should make you a little more comfortable about having your credit pulled.
For more information about credit, you can buy my book Crack The Credit Code on Amazon. Here is the link: Crack The Credit Code – To Play The Game, You Need To Know The Rules
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