How do inquiries affect your credit scores? That’s a question I recently posed to Tom Quinn on my radio show Talk Credit Radio. Tom’s a credit scoring expert with many years of experience, including helping to develop, launch and grow MyFICO.com. He also contributes to Credit.com’s blog. Here is an excerpt from that interview.
Gerri: Fact or fiction? Every time a person applies for credit it costs them 5 points off their credit scores. Is that true or false?
Tom: That is false.
Gerri: So what’s the truth about it?
Tom: Basically, whenever a lender touches your credit report, or if you’re seeking credit, then they usually will pull your credit report to understand your credit risk, and an inquiry is posted. So there are all these different kinds of inquiries out there.
For example, if you come home today and have a pre-approved credit offer in the mailbox, a lender probably pulled your credit report to do that and then there’s a certain code associated with it that can be identified as a” promotional inquiry”. Or, if you get a message on your credit card statement saying, “because of your great credit behavior we’re raising your credit line,” they probably pulled a credit report to do that as well and then an inquiry will be posted. If you go and try to pull your own credit report at myFICO.com for example, an inquiry is posted.
So the good news is, all those inquiries are tagged or identified separately so that the model can really isolate those credit inquiries that are related to you seeking credit, when you’ve actually applied for credit. When you apply for credit, what research shows is that people who applied for credit are riskier than people who haven’t.
But the good news is, inquiries don’t cost a whole lot of points in the big scheme of things. How you pay your bills and how you manage your debt is really what’s counted in the score. Inquiries will add a little bit of predictive value on top and may result in a couple points lost here or there. But the way the inquiry logic works, a couple of things: your inquiry is shown on your credit report for the last two years but that model’s only looking at inquiries in the last 11 months. So those a little older than 12 months, for example, aren’t counted.
And there’s a capping logic. Basically, the way the model works, is once you’ve reached a maximum number of inquiries for that particular score card, whether you have one more on top of that or 15 more on top of that, they don’t count extra against the score. So, in the big scheme of things Gerri, inquiries get a lot of attention by consumers but they really don’t cost them a million points. Really focusing in on paying bills on time as well as managing your debt levels is really what’s going to drive the score.
Image: Valerie Everett, via Flickr.com