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Credit Scoring Explained – Part 5 of 5

The last credit scoring factor, which is credit inquiries and new accounts, gets more attention than it should, especially when considering that it only makes up 10% of your score. I would guess this is because it is fairly easy to understand and control.

The fact of the matter is that if you don’t apply for new credit, you won’t have any inquiries or new accounts. But there is more to it than that. Here are some more details.

There are two types of inquiries, hard and soft. Hard inquiries are when you have applied for a new account and the creditor pulls your credit. Soft inquiries are when your credit is pulled and the purpose is not for the purpose of extending credit.

Examples of this are when you pull your own credit, a potential employer checks your credit or when a creditor checks scores to decide whether to send you a pre-qualified offer, which does not mean that you are approved. It only means that you have met certain requirements for them to ask you to apply for credit with them.

Hard inquiries can affect your score but soft inquiries do not. And hard inquiries only count against your score for one year. They stay on your report for two years but after one year, they have no effect on your score, no matter how many there are.

In fact, after 6 months, as long as there aren’t more of them, inquiries have much less effect on your score.

Another thing you should know is that on mortgages, car loans and student loan applications, it is expected that someone could have their credit pulled more than once. When you apply for a mortgage with a broker, even if you aren’t shopping around, your credit is going to be pulled at least twice, once by the broker and once by the lender they send your file to.

When you apply for a car loan at a dealership, it is not uncommon for them to pull your credit then send it out to several other lenders to see who will give you the best terms.

How would you feel if you knew your credit was going to be pulled 5 times for every dealership you went to and that every time someone pulled your credit, the score would go down? You wouldn’t want to go car shopping, would you? Neither would I.

And most people think this is exactly what happens. Fortunately, it isn’t true.

Credit scoring models used today take this into account. Any inquiries for a car loan within a “short period of time” are counted as a single inquiry. The same thing holds true for mortgages and student loans.

The definition of a “short period of time” depends on whether the lender is using new or old scoring models. If they are using the older models, it is 14 days and with the newer models, it is 45 days. The older models give you less time to shop than the new models but 14 days is still usually enough time to choose a lender for any of these purposes.

Even if it isn’t, you can still do quite a bit of shopping within 14 days and then choose a lender and have your credit pulled once more if necessary.

Even though inquiries and new accounts only account for 10% of your score, it is still a good idea to manage them and make sure you only apply for new credit when you need it. Doing your homework to find out what you really qualify for also helps to avoid unnecessary inquiries.

And opening new accounts you don’t need can reduce your score, even if only a little bit. An example is when you are paying for something at checkout and they tell you that if you apply for an account with them that you can save 10% off that purchase.

For more information about credit, you can find my book, Crack The Credit Code, To Play The Game, You Need To Know The Rules which is available on Amazon. Or, go to my website, CrackMyCredit.com.

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