Your credit score is comprised of many factors. The most important are your payment history and utilization rate. Another factor that often gets overlooked, though, is the credit look-ups or inquiries. These inquiries do have the potential to negatively affect your credit score if you are not careful.
What are Credit Look-Ups?
When you apply for a new credit, the lender usually pulls your credit. This is a credit look-up or inquiry. It lets other lenders know that another lender recently looked at your credit. It’s not that lenders care that other lenders look at your credit. What they do care about, though, is the fact that you may have new credit out there. Sometimes it takes a few months before a new account reports on your credit report. Lenders are leery when they see recent inquiries because it represents another layer of risk.
The Type of Inquiries
There are two types of inquiries a lender can conduct – there are soft and hard look-ups.
Hard inquiries occur when a lender is deciding whether or not to lend you money. A lender providing you with a mortgage, auto loan, or credit card will perform this type of inquiry. One hard inquiry won’t affect your credit score too much. It may lower it by 5 points or so. Unless you are borderline between credit tiers, this shouldn’t be too damaging.
However, if you have many hard inquiries within a short period, it could damage your credit score. Not only does it lower your score, but also it makes you look risky to lenders. They will want to know why you have so many inquiries. To them, it’s a red flag and they generally won’t extend new credit. This is especially true if the inquiries are from credit card companies.
Soft inquiries occur when a company is doing an automatic pre-approval, like you receive in the mail. They also occur when someone like an employer does a background check on you. Soft credit look-ups are not related to you applying for new credit. It’s someone checking up on your credit history to see how responsible you are.
This is not a red flag to new lenders and will not affect your ability to get credit in the future.
Exceptions to the Rule
As we stated above, multiple hard credit look-ups can really hurt your credit. However, there is an exception to the rule. If you are rate shopping, as occurs with mortgages, you may have several hard inquiries on your credit report. The credit bureaus usually recognize that this is an attempt to get the lowest rate available. If the inquiries are within a short period, say 2 weeks, it usually only counts as one inquiry on your report and won’t hurt your credit score.
Understand Your Rights
It’s your responsibility to check your credit report for inaccuracies, including inquiries that do not belong on your credit report. At least once per year you should pull your free credit report from www.annualcreditreport.com. However, you receive one report from each bureau annually for free. You can take one report from each bureau every 3 months to keep a closer eye on your credit. No matter how you do it, make sure you check the inquiries.
If you find an inaccurate inquiry, you can dispute it. In other words, if you find a look-up that you did not approve, it should not be on your credit report.
Once you notice the misinformation, contact the reporting credit bureau right away. You’ll have to prove that you did not give permission for the inquiry in order for it to be removed. Keep in mind, this is often a sign of identity theft, so make sure you check your credit carefully for any other inaccuracies.
Keeping Your Credit Score Up
Keep in mind, credit look-ups are only a small fraction of your credit score. The larger pieces of the puzzle are your payment history, length of account history, and credit utilization rate. A few late payments will affect your score much more than a few look-ups. Lenders look at the big picture when they look at your credit history.
They want to see timely payments, a good mix of installment and revolving accounts, and low balances compared to the available credit. If these are all good and you have a few inquiries, it may not affect your chances of getting a new loan as much as other damaging factors could.
The best thing you can do is do your research before applying for new credit. Know the lender you want to use and what they expect. This can minimize the number of companies that pull your credit. Generally it takes 30 days before the credit bureaus report an inquiry, so if you do have to do multiple inquiries, do them quickly so that the impact to your application isn’t tremendous.