One of the most common questions I receive is how an inquiry can affect a credit score. It’s interesting that people focus on this particular area given that, compared to paying bills on time and keeping credit balances relatively low, inquiries have relatively little impact on your credit score.
First point—there are many different types of inquiries and they don’t all count.
By submitting an application when you apply for credit, you typically give the lender permission to request a copy of your credit report, which helps them make their credit approval decision (check the fine print on the application). This is called a credit inquiry, and those credit inquiries in which you initiate the request for credit may affect your credit score. These types of credit inquiries are often referred to as hard inquiries.
You may notice other types of inquiries on your report. Inquiries associated with pre-approved credit card offers, an employment check, when you ordered a copy of your credit report, or ones posted by your current bank when they conduct a quarterly customer review update—these are all considered non-consumer initiated requests for credit—or soft inquiries—and are not factored into your score calculation because they do not reflect that you are proactively seeking new credit.
[Consumer Resource: Take the Debt Diet Challenge with Jean Chatzky and Credit.com]
Second point—only recent inquiries are considered.
Inquiries remain on your credit report for 24 months. However, most credit scores only consider more recent inquiries—those taking place in the last 12 months, for example.
Third point—credit scores include special logic to accommodate for rate shopping.
For credit that commonly involves rate-shopping (such as mortgage, auto and student loans), most credit scores have special logic to treat these types of inquiries uniquely. This logic was created to accommodate for the way the credit-seeking and lender review processes work for these certain industries.
Using the FICO score as an example, the scoring model uses a special inquiry logic that incorporates a buffer period and an inquiry de-duplication process to eliminate duplicate or related inquiries when you rate shop for the best deal on a mortgage, auto or student loan.
1. The model will ignore any inquiries related to mortgage, auto or student loans that have been posted on your credit report in the last 30 days.
2. In addition, the score looks at your credit report for rate-shopping inquiries older than 30 days. If it finds some, it counts those inquiries that fall in a typical shopping period as just one inquiry when determining your score (14-day span for older FICO versions and 45-day span for the newest versions of the score).
Image: Eli Carder, via Flickr.com