Shopping for Credit Without Hurting Your Credit Scores
Are you cautious about allowing anyone to pull your credit reports because you do not want your credit scores to be damaged by the so-called “hard” inquiries? If so, give yourself a pat on the back. The fact that you are concerned about avoiding any potential damage to your credit shows that you are a conscientious consumer who is trying to make the right choices where your credit scores are concerned.
Why Can Inquiries Hurt Your Credit Scores?
Remember the purpose of credit scores is to help lenders predict the risk of doing business with you. FICO and VantageScore credit scores, the 2 most popular brands used by lenders, are designed to predict the risk or likelihood that you will become 90 days late on any account on your credit reports within the next 24 months. Statistics clearly show that the more often you apply for new credit the higher that risk climbs. So, the answer to the “why” question is, inquiries are predictive of elevated credit risk. As such, the more inquiries the more the likelihood your scores will go down.
Credit scoring models created by FICO and VantageScore are designed to pay attention to how often you have applied for credit in the past 12 months and to assign points for that number accordingly. Every new application for credit will not automatically lower your credit scores a set number of points because that is not how credit scoring works. Instead your aggregate number of hard inquiries within the past 12 months will be viewed and your score could be impacted based on the total number rather than on a ‘per inquiry” basis.
Why Rate Shopping for New Credit In a Short Period of Time Is Different
Credit score creators also understand that interest rate shopping does not typically indicate increased credit risk. To the contrary, taking the time to search for the best rate and terms available arguably shows an increased level of responsibility (though credit scoring models are not designed to reward you for rate shopping either). As a result both FICO and VantageScore’s credit scoring models employ logic that is able to view certain types of inquiries that occur in a relatively short timeframe as being an incident of rate shopping rather than applying for several loans at the same time.
The following types of inquiries may be eligible for this unique treatment by FICO’s credit scoring models: mortgages, auto loans, and student loans. All 3 of these loan types represent cases where you may wish to shop around for the best rates and terms. When you have multiple inquiries for one of these aforementioned loan types, FICO will count all inquiries which take place within a 45-day window as if it were only 1 single event, except while they’re less than 30 days old where they’ll be ignored altogether. VantageScore’s model is a bit simpler to explain. Under the VantageScore credit score all inquiries which occur within 14 days of each other are treated as just 1 inquiry when your credit score is calculated. So, the bottom line is if you’re going to go rate shopping, make it quick.
Hard inquiries, those that are a result of you applying for credit, can remain on your credit reports for up to 24 months, which is good. It’s good because you have the right to see who is pulling your credit reports. But despite them being on your credit reports for 24 months, scoring systems don’t care about them once they become one year old. So, you could have 100 hard inquiries on your credit reports that are between 12-24 months old and they would have absolutely zero impact on your credit scores. At that point they’re just taking up space.