How pulling your credit affects your credit score

How credit inquiries affect your credit score.

Many different actions you take affect your credit score. Your payment history, the amount you owe, the length of your credit history, your applications for new credit, and the different types of credit accounts you have all impact your credit score.

Another factor affecting your score is credit inquiries. It is important for you to know how your credit score is affected by the different types of inquiries that you, your current creditors, or potential creditors make, so you can make sure to act in a way that best protects your credit score.

Hard Pull

When you apply for credit or a loan, the creditor views your credit report to assess your creditworthiness. This almost always results in what is called a "hard pull" or "hard inquiry."

When you apply for a credit card, store credit, an auto loan, a personal loan, or a mortgage, the creditor takes a hard pull credit report. This affects your credit score. From a credit score perspective, when you increase the amount of credit that you can use, you increase your risk. Because your risk increases, your credit score drops.

According to myfico.com,"for most people, one additional credit inquiry will take less than five points off of their FICO score." That is not a big drop. The risk to your score is when there are multiple inquiries, especially those made within a short amount of time.

FICO’s analysis of credit data shows that "people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports." Hard pull inquiries remain on your credit report for two years, but your score is only affected by them during the first year they appear. Hard pulls are viewable by anyone who accesses your credit report.

Shopping for the Best Rate

Sometimes, when shopping for the best rate available on a loan, for instance, it makes good sense to speak with multiple lenders, each of whom will want to view your credit report. In fact, you would be foolish not to rate shop, when looking for a mortgage or auto loan. While each separate inquiry will appear on your report, your credit score will not be necessarily be dinged for each separate inquiry. The key is the timing of the inquiries.

The credit scoring agencies recognize that it is reasonable and valuable to consumers for them to rate-shop. Therefore, inquiries for the same product that are made within 14-45 days of each other are counted as one inquiry. The exact length of time depends on which credit scoring model is used. If you are rate-shopping, make a concerted effort to do so less than two weeks apart, to minimize the impact on your score.

Soft Pull

Many credit inquiries have no effect on your credit score. For example, if you request to look at your own credit report, it has no effect on your credit report. This kind of request results in a "soft pull" or "soft inquiry." If a lender makes a request to view your credit report in order to screen you for a pre-approved credit offer, this will not affect your score, even if you see it on your report. Also, if your employer pulls your credit report, it will not be counted against you.

Sometimes, a bank or a utility may view your credit, when you want to open an account. There is no hard and fast rule whether this will be done as a hard inquiry. You can ask the customer support representative about the company’s policy, in an attempt to avoid unnecessary hard pulls. Still, there are reported cases of a customer being told the inquiry will be done as a "soft pull" and then the company actually does a hard pull.

In these instances, a consumer can request that the company report to the credit bureau that the inquiry was supposed to be a soft inquiry, but it is a difficult process to get the inquiry status reversed, if the firm does not honor what the customer support representative said. If you can, try to get an commitment for a soft pull in writing, so you have proof if the creditor uses a hard pull instead.

There are times when one of your current creditors may pull your credit, if you are applying for a new service they offer, such as if you have internet and phone service with a company and want to add cellular service. Again, it is best to ask in advance if this will be done as a hard or soft pull.

Summary

There are times when you are well-served to apply for credit. Credit applications result in hard pull inquiries which lower your credit score. Try to limit the amount of hard pulls, applying only for loans and credit cards you need.

Rate-shopping is smart, but make sure to apply for the same kind of product within two weeks of the first inquiry. This that causes the multiple inquiries to be viewed as only one, in terms of your credit score, even though all inquiries appear on your report. It is good "credit hygiene" to view your own credit report regularly. Your requests to view your report are viewed as soft pulls and have no negative effect on your credit score.