Some things never change when it comes to what annoys people about credit scores. Consumers’ understanding of credit scores has evolved over the years with largely positive results. Credit card holders in California and Wisconsin have credit scores as high as 750, up over a hundred points since 2010, partially thanks to better education about credit scores. However, within that always increasing level of understanding there remain some parts of credit scoring, such as inquiries, that people just don’t seem to get. They get the idea of late payments and maxed out credit cards predicting risk. But inquiries?
A credit inquiry is a notation that goes on your credit report every time your credit report is accessed by anyone with a “permissible purpose,” as defined by the Fair Credit Reporting Act. Inquiries remain on a credit report for two years, and generally fall into two categories: hard and soft inquiries. Only hard inquiries from within the past year can impact credit scores. Older hard inquiries and soft inquiries are ignored by the scores entirely.
The typical hard inquiry is triggered when a lender accesses a consumer’s credit report and score as part of the credit application process. Hard inquiries can also result from collection agencies using credit reports in their skip tracing efforts.
Soft inquiries include inquiries resulting from consumers accessing their own credit reports, lenders making pre-approved credit offers, creditors periodically reviewing existing accounts, and insurance and employment credit checks. Not only are soft inquiries ignored by the scores, they are excluded from credit reports seen by lenders, and only appear on the consumer’s report.
Some of the ways in which inquiries provide value to lenders and consumers:
According to Fair Isaac (FICO), people who have added six or more inquiries during the past year can be up to eight times more likely to file for bankruptcy than those with credit reports showing no inquiries.
-As the only major area of your credit report to update immediately, inquiries during the past year can be up to eight times more likely to file for bankruptcy than those with credit reports showing no inquiries.
-Inquiries can provide early evidence of identity theft when a consumer’s credit file has been accessed fraudulently.
Knowing just a few basic facts about inquiries and credit scores can help avoid costly misunderstandings and mistakes that can drop valuable points from a credit score:
-For most consumers, one additional inquiry will take less than five points off their credit scores
-The “rate shopping” feature of credit scores allows you to have any number of mortgage, auto or student loan inquiries on your credit report from within any 14- or 45-day period (depending on the scoring model), with only one of those inquiries counting in the score.
-Inquiries appear on your credit report for two years, but are only considered by credit scores for the first year.
Consumers who still don’t buy the argument that inquiries help predict risk and detect identity theft may instead want to consider inquiries as just one more good reason not to apply for a credit card they don’t really need, since an inquiry and new account could drop their credit score before the card even arrives in the mail.
