What in the world is an inquiry? And, more importantly, why do they hurt my scores? And how are people who shop for the best rates protected from many inquiries? Let’s tackle these in order…
The definition of a credit inquiry is – A list of all entities that pulled your credit reports and on what date. An inquiry’s two parts (date and industry type) are important, and we’ll dig into that later on. The credit bureaus generally keep a list of inquiries from anywhere between 6 months and 2 years.
All inquiries can be categorized as either “hard” or “soft”. Hard inquiries are usually the result of you applying for some sort of credit or other benefit. Soft inquiries are usually the result of someone pulling your credit for a reason not reactive to an application. For example, a home loan application results in a hard inquiry, as do credit card applications. Consumers claiming copies of their own credit reports results in a soft inquiry.
Hard inquiries can be seen and scored by lenders and credit scoring systems. And anyone or any company who pulls your reports can see a full listing of your hard inquiries, for the previous two years. The hard inquiry can hurt your credit scores but they can only do so for up to one year. FICO doesn’t consider any type of inquiry that’s older than 12 months. So even though they may still be on your credit reports, they are not influencing your scores at all.
To the contrary, soft inquiries can’t hurt your scores. Lenders can’t see them and neither can anyone else, other than you. There was a time when the credit bureaus maintained them for just 6 months, but I’ve seen them listed for as little as 3 months or as long as 12 months, depending on the bureau record.
There is different treatment by FICO scoring models depending on the type of inquiry. For example, mortgage, student loan and auto loan inquiries are ignored for the first 30 days they’re on your credit reports. This means they have no impact on your scores regardless of the volume. This is also why rumors of mortgage lenders or auto lenders lowering your scores because they’ve pulled your credit are likely to be untrue because any score impact, if any, wouldn’t show up for at least 30 days. It would never be immediate even if your credit reports were “shot gunned.”
There are also safeguards in FICO scores that protect consumers who choose to shop around for the best interest rates for mortgages, auto loans and student loans. Since you can get different rates from different lenders for those loan types it makes sense for consumers to aggressively shop for the best deal, especially if they have strong credit.
In the late 1990s FICO programmed their credit bureau scores to consider multiple inquiries on “shoppable” loans in a short period of time as one inquiry rather than multiple inquiries. This was very consumer friendly because it allowed consumers to put aside the fear of shopping for credit when they knew there were better deals to be had by competitive lenders.
At one time the “short period of time” was only 14 days, which is certainly better than no protection at all. But it did force consumers to hustle with their rate shopping. Now the time frame is 45 days, which allows consumers to leisurely shop for credit and still enjoy the FICO score protection from multiple inquiries. For example, a consumer can apply for the best rate on an auto loan from 7 different lenders, which would have resulted in 7 inquires in a few days. Since those are initially “under 30 days old” they count as 0 inquiries in your FICO score. And after 30 days they count as one inquiry because they’re within 45 days of each other.
Store credit cards, gas cards and general use credit cards do not enjoy this consumer friendly treatment because you don’t shop around for credit cards like you shop around for home and auto loans. So, if you want a credit card then do your research online before you apply because each individual inquiry can cause score damage.
This is also why you should be very careful when you’re at the malls and the store clerks ask you if you want to save money by opening a new store account. Each time you do this it’s an unsophisticated way of applying for credit. But to the credit bureaus it’s no different than you applying online for a store card from the comfort of your home. You’ve given them access to your credit reports, which means a new retail store credit inquiry. And, those are not protected at all.
There are, however, some interesting tidbits regarding inquiries that are not obviously known because they’re not floating around in the cyber-world. When you apply for a job the employer can pull your credit report. This leaves an employment inquiry, which does not count in your scores. When you apply for homeowner’s or auto insurance the insurance company can pull your credit reports in most cases. This leaves an insurance inquiry, which does not count in your scores. When you apply for utilities the service provider can pull your credit reports to determine deposit requirements. This leaves a utility inquiry, which does not count in your scores.
Exceptions aside, the value of inquiries isn’t that great to begin with. In fact, 10% of your FICO score is influenced by inquiries so it’s never the reason why your score is great, or terrible. But, it’s important enough to cost you a loan or a better interest rate because even if you fall 5 or 10 points below a lenders requirement…you’re not scoring good enough. Avoiding unnecessary inquiries or strategically shopping so that you leverage the FICO inquiry logic is the best way to max out the point in the inquiry category.