By Michelle Singletary
When you go shopping for a car or a home, do you become a little concerned when you hear these words: “Can I pull your credit report?”
Lots of consumers bristle, for they know (or think they know) that this means a credit inquiry could be posted on their credit report. The credit-smart folks out there understand that with too many credit inquiries, their all-mighty credit scores (generated by each of the three major credit bureaus) could take a hit.
In fact, a reader sent me an e-mail on this very issue. He wrote: “I hear that every time you test drive a car, the dealership runs a credit check, and since the big three credit reporting companies penalize you (i.e., lower your credit rating) for more than three credit checks within a certain time period, the test drives can cost you.”
Is this reader right? I put the question to the all-knowing Fair Isaac, the company that created the FICO credit-scoring model many lenders use.
“It's ironic that so much attention gets focused on credit inquiries because they are such a tiny part of the FICO score,” said Craig Watts, public affairs manager for Fair Isaac.
For starters, Watts dispels the notion that there is an inquiry quota of three. “That's a myth,” he said.
But perhaps it would help if I first explained why the scoring models count inquiries or requests a lender makes for your credit report or score when you apply for credit. Lenders use scores to assess how risky a borrower might be. Multiple credit inquiries could indicate someone is having money problems and needs lots of credit.
So here's the truth about credit inquires, according to Fair Isaac.
The credit-scoring model recognizes that many consumers shop around for the best interest rates before purchasing a car or home, and that their searching may cause multiple lenders to request their credit report. To compensate for this, multiple auto or mortgage inquiries in any 14-day period are counted as just one inquiry.
In the newest formula used to calculate FICO scores, that 14-day period has been expanded to any 45-day period, Watt said. This means consumers can shop around for an auto loan for up to 45 days without affecting their scores. That doesn't mean the old 14-day rule doesn't still apply because some lenders might not use the new version.
The newest FICO version went online at all three credit agencies – TransUnion, Equifax and Experian – in 2004, Watts said. Typically, it takes lenders months to adjust their processes so they can accommodate revised formulas, and some lenders never adjust, he added.
- The FICO score ignores all mortgage and auto inquiries made in the 30 days before scoring. If you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping.
- Each “hard” credit inquiry (meaning the consumer has applied for some form of credit, prompting the creditor to check his/her credit report or score) that is counted normally subtracts no more than five points from a person's score. Often no points are subtracted.
- The score does not count inquiries a lender has made for your credit report or score in order to make you a “pre-approved” credit offer (you know those darn offers that crowd your mailbox).
- The formula doesn't count inquiries made by a lender reviewing an account you already have with them.
- Inquiries that come from employers are not counted. Nor is it counted when you ask to see your own report or score.
“Realistically, only a narrow group of people has good reason to be cautious about the effect inquiries could have on their FICO score,” Watts said.
Here's who might be concerned, according to Watt:
- People who take an unusually long time (several months) to shop for a new mortgage or auto loan.
- Consumers who shop around in the same year for several different lines of credit not associated with a mortgage or auto loan.
- People who know before they begin applying for credit – presumably from conversations with creditors – that their credit score barely qualifies them for their desired credit offering.
“We generalize by saying that typically no more than 10 percent of a FICO score's weight is determined by a person's taking on (and searching for) new credit,” Watts said. “But for most people, inquiries have little to no influence on their FICO scores.”
So there you have it: the lowdown on credit inquiries.