Credit Inquiries and Credit Scores

We get lots of questions from people who want to know if allowing us to pull their credit will hurt their credit score.  This is generally a conversation we have when they are calling us for information about buying a home.   They want to be sure that if they are talking to 3 or 4 lenders they are not dropping their credit score with credit inquires each time a lender pulls their credit!

Have you ever gone to the store, and the person in front of you pulls out 9 credit cards trying to figure out which one they are going to use for the transaction?

You’ve seen them, they open their purse, and there’s an explosion of store credit cards like an erupting volcano. This is all due to that delightful store clerk asking them at every store if they want that tremendous 20% off today’s purchases by applying for their store card.

Other than having too many revolving accounts, these types of individuals are also being crippled with “too many inquiries” (as indicated on their credit report).  These inquires are DIFFERENT than having 3 or 4 Loan Officers pull credit when you are shopping for a Mortgage.

Here is the reality. The impact from applying for a credit card – will fluctuate from person to person based on their unique report and history.

Credit Inquiries

In the overall scheme of things, a single credit inquiry for a credit card can be big, typically ranging from 2-5 points lost, or one percent of your score. This can really add up over the year.

Fair Isaac Corporation’s algorithms will view someone as a greater risk when they see them applying for multiple new credit cards in a short period of time.

If we are talking to someone who is applying for a mortgage, a car loan, a boat loan and a couple of credit cards all in the same week. Well, it’s logical that the Credit Scoring Companies will be at a higher risk, and will have a much better chance of overextending themselves than someone who pulls their credit once every six months.

We had a client who was shopping for a CAR last week, and was told his credit score was 722.  We pulled his credit today, and unfortunately, his MORTGAGE credit scores were 646, 678, and 652. To get him the best mortgage rates, we needed his middle score (652) to be OVER the 660 range.

Was this because he had excessive credit inquiries on his credit report?  We don’t think that’s what caused his credit scores to go down.  He said, “well, no problem, I’m just gonna pay off my credit cards, and close some accounts. ”

No, No, No, No Nooooooooooooo!!!!!! Making Adjustments To Your Credit Score is NOT a DIY Project!

Credit Inquiries and Credit Scores

Statistically, people with six inquiries or more on their credit report in the last 12 months are up to eight times more likely to declare bankruptcy than someone without any inquires at all.

However, there’s a difference in getting a credit card at every store – and the credit inquires that result from having 3 or 4 Loan Officers pull credit when you are shopping for a Mortgage.

Let’s not forget what a credit score is. It’s a tool that is used to reflect the most recent read in your credit picture.  Sure, each Credit Model has a little Black Box – meaning we don’t know EXACTLY what they use to score you.   However, we know that the credit models will allow you to shop for a mortgage, and the resulting credit inquiry will not hurt your credit score.

Credit Inquiries: The difference between a “hard pull” and a “soft pull”

As we discussed in our last tip, having your credit pulled for credit cards can be quite detrimental to your FICO credit score. However, what also comes into play are “Hard” Inquiries and “Soft” Inquiries.

Hard inquiries (credit inquiries) occur only when “you are applying for more debt.” Soft Inquires, on the other hand, are all other inquiries. Can you guess where the largest quantity of soft inquiries comes from? Surprisingly, they come from your current creditors performing routine checkups.

ALSO, depending on what kind of employment you have, there will likely be at least an annual inquiry from your employer.

You may not know this because it’s in the minute writing you didn’t read when signing your contract with the folks who sold you your car, or the credit cards you were sent.

“Your creditors frequently pull your credit for continued risk assessment; this way, they know if they should offer you a credit limit increase, slap you with a credit limit decrease, or if things look really grim, just end your shopping spree altogether with a closed account.”

Another popular soft inquiry that will appear is when you check your credit report online. A soft inquiry will not cause a point deduction on your credit report.

A hard inquiry on the other hand is going to occur when you apply to have your limit increased on your credit card, that would be “hard” versus your creditor doing it on their own accord.

When qualifying for a mortgage, every point counts, especially the 2-5 point deductions that the average hard inquiry creates.

A “shopping window” for inquiries allows you to shop for product providers like a mortgage.  In general we believe that you have between 15 and 30 days to shop, call Lenders etc. before you generate another Hard Inquiry. Again if you are shopping for DIFFERENT items, like a car, a credit card and a Mortgage all at the same time – you will likely be damaging your credit.

ELEANOR’s TIP:  When you are applying for a mortgage, we really do need to see your credit report.  Have the person who pulls it send it to you, if they can.  Once you have it, you can securely send the PDF to other Lenders until you decide who you want to work with.

Congress and Mortgage Credit Reports

Congress required FHFA The Federal Housing Finance Agency that oversees Government Mortgage Loans, USDA  Home Loans in NC and Conventional Lending to come up with better systems for monitoring credit. They are no longer putting some judgements and Bankruptcies on Credit Reports we receive as Mortgage Lenders.