Credit Inquiries: What You Need To Know Before Applying For Credit
BY Frank Bruno
Applying for credit normally involves the lender looking at your credit report. What you must be aware of is how applying for credit affects your credit report. Every time a credit application is made, whether it's for a credit card, car loan, mortgage, or even insurance, an "inquiry" is placed on your credit report. An inquiry is a record of who accessed your credit report in order to make a credit decision.
Inquiries, by nature, are not harmful to your credit. In order to obtain credit, an inquiry must follow. However, when inquiries become excessive, it will lower your credit score by at least 5 points for each inquiry.
Many experts have stated that inquiries remain on your credit report for 6 months, and then disappear. However, in practice, lenders see about 2 years' worth of inquiries. This is important to note because today's credit application impacts your credit two years in the future.
When you receive credit card solicitations in the mail, a credit inquiry was made by the card company. However, these inquiries don't count against you or your score. If you decide to respond to the solicitation, then you will have a credit hit.
When you're shopping for a home loan, you can have multiple mortgage company inquiries without affecting your credit score. However, in general, the inquiries must be within 30 days of the first inquiry. Therefore, before applying to the first company, make sure you have all of your finances, documentation, and questions in order. That way, you can make multiple applications within the 4-week window.
Inquiries are especially scrutinized by mortgage companies. Guidelines vary, but if they see at least 10 inquiries, they will note a pattern of being a "credit junkie." It impacts your approval because they suspect that, after you get their loan, you will apply for more credit. Chances are you will max out your credit limit, increasing your monthly debt load. An increased monthly debt load can lead to trouble meeting payment obligations. Trouble making mortgage payments can lead to foreclosure.
When you are applying for a mortgage, do not apply for any further credit until your loan is closed. Many mortgage companies will run another credit report prior to closing your loan. If they see a non-mortgage company inquiry on your credit, that might be enough reason to revoke an approval.
If you're applying for credit over the phone, try to get a general idea of what the approval criteria is for the credit company. If you know your credit score, you can avoid needless inquiries. You can easily find out from a lender what credit score is needed for an approval.
Note that the lender cannot tell you, before pulling your credit, whether you'll be approved or denied for a loan. For example, if you tell them that you filed bankruptcy 6 months ago, they cannot tell you that you will be denied. This is a Fair Credit Reporting Act violation. They will have made a credit decision without looking at your credit report. There is no way for them to know if you're accurate in your own credit assessment.
What they can do, however, is tell you their general guidelines. For example, this is a perfectly legal way for them to respond: "In general, our guidelines state that you must be out of bankruptcy for at least 2 years and have a score of at least 620. However, without looking at your credit report, I can't make that determination. The best thing to do would be for us to continue with an application. May I continue?"
You can then decide at that point whether you want to risk a credit inquiry. Of course, if it's plainly obvious that you'll be denied, you can walk away, save the inquiry, and begin a score-boosting campaign.
Do not be in a rush to obtain credit. Very seldom will you come across a situation where you'll need instant credit to avoid a catastrophe. When you take your time, you can examine your own credit and take the necessary actions to raise your score. When you've cleaned your credit, your chances of approval will soar, and you will have avoided unnecessary inquiries that would have lowered your score.
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