May 20, 2006

Does an inquiry affect your credit score?

The answer is yes and no; but mostly yes.  Sound confusing?  Please allow me to explain.

A credit report will contain both “hard” and “soft” inquiries.  A “soft inquiry” does not affect your credit score.  Soft inquires include those that were generated from running your own free credit report as well as other inquires that were not prompted by your own actions.  A “hard inquiry” can affect your credit score.  A hard inquiry results from your application for a mortgage, auto loan or from another credit request.  A hard inquiry will more dramatically impact the FICO of a borrower with a thinner credit file (less credit history) than that of a borrower who has a more established and lengthy credit record.  According to Fair Isaac, “People with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports”.
 
The FICO model that is currently used by most mortgage lenders will count all mortgage inquiries in a fourteen-day period as just one inquiry and will also disregard any inquiries within the most recent thirty days prior to scoring.  The Next Generation FICO (a more advanced FICO model that has not yet been adopted by FNMA) is even more liberal.  In addition, any inquiries that are over twelve months old have no impact on your credit score.  The problem is that the inquiries are not always coded properly.   As a matter of fact, according to a 2003 report by the Federal Reserve Board (federalreserve.gov/pubs/bulletin/2003/0203lead.pdf), “fewer than 2 percent of the records of inquiries included information about the purpose of the inquiry; it is impossible to determine with certainty if bunched inquiries represent shopping for a single loan purpose or requests for different loan products”.
 
In conclusion, be careful when applying for credit.  A credit grantor’s “hard inquiry” can drag down your FICO score.
 
 

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