Each day we are asked about credit scores and the voodoo behind them. Today we’d like to share some knowledge on credit scoring beyond the simple idea that a high score is good and low is bad. Most commonly we are asked what determines a credit score and if inquiries affect a score. The credit bureaus are made up of members who agree to put their accurate information into the system so that other members can access the details of clients to varying degrees for the purpose of locating or determining credit worthiness. Generally members report if a client has a loan, current status of the loan, balance of the loan and what type of loan it is.
The two major credit agencies will track and review all your requests for credit in the last 6-12 months. Those credit inquiries account for 10% of your overall score. Similar to how assignments and tests in school have weighting the credit score does as well. Other factors that determine your complete score are payment history, type of credit, utilization and balances.
People often hear the expression soft and hard inquiries. A soft inquiry is when you check your own score or in some cases get a quote online. Soft inquiries do not affect your score. A hard inquiry is when you are applying for credit. On its own it is not a bad thing as the credit bureaus are built around credit. Where a client can see inquiries affect their score is with multiple inquiries over a short period of time as that appears to someone reviewing the file as credit seeking which can be a red flag. For a strong credit score a couple of hard inquiries likely has no effect on accessing credit as many people will change credit cards to improve their rate or points earning and take advantage of sign up bonuses. When you have a marginal score (525-600) multiple inquiries can have a greater affect as the weighting can pull that score into dangerous territory.
It is often said to people to not worry if they are rate shopping a car or mortgage and have multiple inquiries because the bureaus recognize that and account for it. This may be true and again it likely does not affect high score people. Marginal scores should be careful and make stipulations when applying at a dealership that they authorize one pull and want to be notified and need to authorize additional pulls. A lender is less likely to lend when a client comes to them and they see they have been looked at by 6 or 7 other lenders already and none of them initiated a loan. As a lender you ask yourself, what everyone else knows that I don’t know? Protect and control your inquiries. You have that power. Often when a dealership sends to multiple places a person is not aware they are. Be sure to ask what is happening to your information and their application process. You may still agree to it but at least you are aware of the process and potential pitfalls.
We have had many great successes helping clients build their scores over the last decade. It’s up for debate if the pride people have in a good credit score is warranted but one certainty is that a good credit score helps in many ways and it can always be improved, usually by some small intentional measures that once learnt go a long way.