Understanding Credit Pulls

Understanding Credit Pulls
One of the most misunderstood elements of an individual’s FICO score is the impact that credit pulls, more commonly referred to as credit inquiries, will have on the score itself. While most inquiries will not negatively impact your credit score, it can have a negative impact on how potential creditors view your report, subsequently resulting in a denial of credit or higher interest rates.

There are certain types of inquiries in which creditors will expect there to be multiple inquiry records, such as inquiries from mortgage lenders or automobile lenders, which simply indicate that the person is shopping for the most affordable loan. As a general rule, multiple inquiries from these types of lenders are treated as a single inquiry — carrying no penalty among most lenders.

What is an Inquiry? Understanding the Basics

When you apply with for credit for any of a number of reasons, it is likely that the potential lender will pull your credit report; this is referred to as a credit inquiry. There are two primary types of inquiries. There are those in which you are applying for credit and you authorize the lender to check your credit, and then there are credit checks that are run by third party businesses that you have not authorized to run your credit. This can be done by a bank that might be considering purchasing an existing loan of yours from the original lender, or a number of other different reasons. Only those inquiries that you authorize for the purpose of obtaining credit will be a part of the calculation of your FICO score.

Does an Inquiry or Credit Pull Affect Your Credit Score?

The simple answer to this question is yes, it can; however, as a general rule, if an inquiry does impact your credit score, the impact will only be a couple of points or more. Actually, your credit score is more likely to be negatively affected by opening multiple credit accounts in a relatively shorter period of time than through any logged credit inquiries. Where inquiries can carry more gravity is if the pattern in which inquiries exists are indicative of attempting to open multiple credit accounts at once, as opposed to shopping for the best rate.

The significance in which a credit inquiry can impact credit scores varies on a person to person basis, depending on credit histories, income-to-debt ratios and more. While there is no universal measurement that can be applied to a point deduction off of credit scores, your credit score should not fall more than five points based on one additional inquiry. Where inquiries have a greater impact is when there are fewer credit accounts on the report, or there is a short credit history to work with. The longer and more extensive the history, the more stabilized the credit score will be, and the less impact something as trivial as an inquiry will have.

The Formula Varies Based on the Type of Inquiry

As previously stated, inquiries that are indicative of rate shopping are given very little gravity on the impact scale, and the system will generally ignore them if they were posted within the previous 30 days prior to the scoring. What this means that the person who is rate shopping for a loan will not be negatively impacted at all if they find a loan within a 30 day window.

The best way to ensure that rate shopping does not have a negative impact on your FICO score is to concentrate your rate shopping within a specific timeframe, preferably 30 days. The focused rate shopping along with prompt payment of all debt should ensure that your credit score improves, even while you are shopping for a loan.

Another way to help increase your credit score, even when you may be shopping for a loan, is to keep all balances as low as possible.

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