Credit scores, like FICO and Vantage Scores, are based upon a variety of factors. For FICO scores the factors which make up an individual's credit scores fall into 5 categories. The least influential categories, Mix of Credit and Inquiries, each account for 10% of a consumer's credit scores.
While 10% may seem like a small percentage, and it is small in the grand scheme of your credit scores, it is not an insignificant number of points. FICO credit scores range from 300 - 850. That's a total of 550 points that any given consumer has the opportunity to earn for her credit scores. Since the Inquiry Category accounts for 10% of those points there could be a potential 55 points up for grabs (depending upon the score card being used to determine the consumer's scores).
Why Inquiries Appear on Credit Reports
Whenever anyone requests to see a copy of your credit report a record known as an inquiry is placed on your credit report. In fact, most consumers do not realize that the reason that the credit bureaus place inquiries (aka records of credit pulls) on their credit reports is due to the fact that the Fair Credit Reporting Act [FCRA 15 USC Sec. 1681g(a)(3)(A)] requires the credit bureaus to record whenever a consumer's credit report is accessed for a period of at least 1-2 years, based upon the type of inquiry. In an effort to comply with the FCRA the credit bureaus have made a blanket policy that all inquiries will remain on a consumer's credit report for 2 years.
Credit inquiries can be sorted into one of two categories - those that may have the ability to negatively impact a consumer's credit scores and those which do not have the ability to negatively impact a consumer's scores. Inquires which have the potential to cause credit score damage are known as "hard" inquiries. Not all hard inquiries will automatically cause credit score damage and, in special circumstances, numerous hard inquiries might be counted as only "1" inquiry for credit scoring purposes. Below are some examples of hard credit inquiries.
- Credit Card Applications
- Mortgage Applications
- Auto Loan Applications
- Collection Agency Skip-Tracing
- HELOC (Home Equity Line of Credit) Applications
Inquiries referred to as "soft" are treated differently by credit scoring models than "hard" inquiries. Soft inquiries are still able to remain on consumer credit reports for 2 years; however, soft inquiries do not have any impact upon credit scores whatsoever. They will not help nor hurt a consumer's credit scores. Here are some examples of soft credit inquiries.
- Checking Your Own Credit Reports
- Promotional Inquiries (Think pre-approved credit card offers)
- Your Current Lenders Checking Your Credit Reports
Inquiries and Your Credit Scores
Consumers often find it frustrating to learn that certain inquiries have the ability to negatively impact their credit scores. The reason that hard inquiries may lower your credit scores is because inquiries can be a reliable indicator of credit risk. In other words, when FICO reviews credit reports samples it finds a trend which demonstrates that people who apply for a lot of credit in a short amount of time are more likely to pay their bills late. People who apply for credit less often are less likely to pay their bills late. Therefore, people with fewer hard inquiries are usually rewarded with higher credit scores.
Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here.