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The real impact of credit inquiries on credit scores

impact of credit inquiry on credit scores

Consumers frequently want to know if applying for new credit will drop their credit scores. The quick answer is – Yes. Your scores will more than likely take a hit when you apply for new credit.

The impact from applying for credit will vary from consumer to consumer based on their unique credit histories. For most consumers one credit inquiry will take less than five points off their credit score. But credit inquiries can have a greater impact if you have few accounts or a short credit history.

The FICO credit scoring formula is complex — to say the least. But this is what can be extracted from the information we do know about impact of credit inquiries:

What is a Credit Inquiry?

When you apply for credit, a bank, lender or credit card issuer will “inquire” the credit bureaus about your credit history. The three major credit bureaus are Experian, Equifax and Transunion. Most creditors will inquire about your credit from one or two credit bureaus, but there are some creditors who inquire about your credit from all three of the major credit bureaus.

If you check your own credit report there is a section for “credit inquiries.” Credit inquiries are listed in that section. You may notice credit inquiries from businesses you don’t know, but these should be what is referred to as “soft inquiries.” Soft inquiries do not impact your credit score.

Hard inquiries, which are typically a result of you applying for credit, will impact your credit score. Let’s examine the real impact of hard credit inquiries on your credit score.

Applying for Credit Cards

As previously stated one credit inquiry will take less than 5 points from most consumers’ credit scores; however, one hard credit inquiry may take up to 10 points from certain consumers. The exact calculation from FICO is not revealed but it really depends on each consumers’ individual credit history. There is no magic number of applications that you should limit yourself to, but in general, the fewer the better.

Frequently applying for many new accounts hurts your credit score more than applying for a single new account. Another negative impact of applying for multiple credit accounts is that current creditors and potential creditors may view you as a high risk for default.

If your credit is good, seeking new credit will have a relatively modest impact on credit scores. If your credit is not so good, a decrease in credit score due to inquiries might have a huge impact. Consumers with good credit scores can recover from whatever impact of seeking new credit because they already have good credit reporting.

Consumers with several negative items in their credit files or short credit histories may have a harder time recovering from credit inquiries because they may not have enough positive items reporting.

Applying for an Auto Loan

Most credit scores are not affected by multiple inquiries due to shopping for an auto loan. The impact is relatively small if you apply for multiple auto loans within a short period of time. The credit scoring model cuts you some slack for “rate shopping.” It is not unusual for consumers to seek auto loans from multiple lenders. FICO realizes this and will count the multiple inquiries as one inquiry. The key here is shop for a car loan within a 14-day period.

Applying for a Student Loan

Those of you who have to apply for student loans can take comfort in knowing that multiple student loan applications will only count as one. Just make sure you apply to the various banks within a 30-day period. In addition, the score looks on 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.

Applying for a Mortgage Loan

It is expected home buyers will shop for the best rate possible when looking for a mortgage loan. The FICO scoring system takes this into account and allows a period of 30-days to rate shop. Each inquiry related to shopping for a mortgage loan will only count as one inquiry when calculating your credit score. In fact, under the newest FICO scoring model, FICO 8, borrowers are allowed a 45-day rate shopping period. The only problem is the majority of lenders are still using older models of FICO.

Impact of Credit Inquiries on Credit Scores

Applying for new credit accounts for about 10% of your credit score. According to FICO, consumers with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than consumers with no inquiries on their reports.

When the FICO scoring model indicates you have been applying for multiple credit accounts as opposed to interest rate shopping for a single loan such as an auto loan; student loan; or mortgage loan, it will ding your credit score. A single inquiry will have little impact on the credit score.

Considering not all inquiries are treated the same, if you are interested in maintaining a good credit score or rebuilding credit scores, your best bet would be to pay all bills on time. Payment history accounts for 35% of your overall credit score.

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