Understanding Why Too Many Credit Inquiries Can Hurt Your Credit Score

July 23, 2015

Many of our applicants are surprised when they realize that applying for credit from multiple lenders (such as department stores or auto dealerships) has negatively impacted their credit, and temporarily prevented them from qualifying for the business loans or lines of credit they need to fund their business.

They become frustrated that even though their overall credit may be good, multiple credit inquiries can have such a negative impact on their credit scores as well as their ability to access business funding. I hope the information below address some of these concerns.

What is a Credit Inquiry? Whenever you apply for credit from any lender, retailer, auto dealership, mortgage lender, etc., you are authorizing the lender to ask (or inquire) for a copy of your credit report from one or all of the credit bureaus. Later, you may notice these credit inquiries listed on your credit report. There may also be businesses or lenders listed on your credit report that you do not know or did not directly give permission to receive a copy of your credit report. However, the only credit inquiries that count toward your Fair Isaac Corporation (FICO) scores are the ones that result from your applications for new credit.

Are There Different Types of Credit Inquiries? Yes, there are two types of credit inquiries: hard and soft inquiries. A hard credit inquiry is when you are applying for new credit. A soft inquiry is when a lender pulls your FICO Score for marketing or other purposes, such as when a landlord or potential employer might pull your credit. Fortunately, soft credit inquiries have no impact on your FICO Score. Hard inquiries, on the other hand, only hurt your score if there are several in a short amount of time.

Why Does It Matter How Many Credit Inquiries I Have? To lenders, if you have applied for or opened several credit accounts in a short period of time, you may represent a greater credit risk and the lender may be less likely to extend you a loan or line of credit. They may assume that you will be unable to repay these credit accounts and will eventually default, or that you have some type of financial hardship, such as health problems or a job loss that will make it more difficult to repay the loan.

Will Only One Credit Inquiry Affect My Credit Score? The effect of applying for credit varies based on an applicant’s individual credit history. Typically, for most applicants, one credit inquiry will take less than five points off the applicant’s FICO score. Credit inquiries can have a greater impact if the applicant is a young person with a shorter credit history, or if the applicant simply does not have a lot of credit experience. Large numbers of credit inquiries, however, means greater risk for the lender. Some studies have shown that people with six or more credit inquiries on their credit reports are more likely to declare personal bankruptcy than people with no inquiries.

What is Rate-Shopping? InvestorWords defines rate-shopping as “The act of reviewing interest rates from various lenders and on various loan or credit products. Rate shopping allows a consumer to understand the costs of available products and the differences between lenders.” If rate-shopping is done within a short period of time, such as two weeks, it should have little impact on a person’s credit score.

What Can I Do to Limit the Impact of Credit Inquiries on My Credit Report? If you need a loan or line of credit, make sure you do your rate-shopping within a short period of time. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. Also, do not give permission for a lender to obtain a copy of your credit report if you are not yet ready to make a purchase.

Credit inquiries are only a small measure of your overall creditworthiness, but still very important.  People with high FICO Scores regularly pay their bills on time, keep their credit utilization (debt-to-credit ratio) low on credit cards and other revolving credit lines and apply for (and open) new credit accounts only when needed.

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