When I am talking to a client about preparing to buy a home, I always inform them to not apply for a new line of credit or credit card. Applying for a single credit card has a negligible effect on their score but applying for several in a short period of time does make a difference. Doing so can affect their over all credit score and can in turn change their eligibility for certain mortgage programs. When you apply for credit, an inquiry is generated. The creditor wants to determine what your current credit score is and what your credit history looks like in order to determine what program will best fit your needs and eligibility.
So, what is a credit inquiry? An inquiry is a notation on your credit report that someone has requested your credit file or that you have requested credit. Two types of inquiries may appear on a credit report. These are known as “hard” inquiries (can impact your credit score) and “soft” inquires (that don’t)
What counts as a hard or soft inquiry?
Applying for a loan or credit card can result in a hard inquiry, but applications not tied to a form of credit can result in a hard inquiry as well. A credit check for a new mobile phone or apartment, for example, can also generate a hard pull on your credit report. “The general rule is, if it is an inquiry that indicates that you may be taking on additional financial obligations, then that could be meaningful to your risk of being able to repay other debts,” says Maxine Sweet, vice president of public education for Experian, one of the three major credit bureaus. A cellular phone or apartment signifies the possibility of an additional monthly payment.
Soft Inquiries not related to a new financial commitment won’t hurt your credit score. These include credit checks from employers, companies sending preapproved offers of credit or insurance, existing creditors conducting periodic account reviews or your own request to see your credit file.
How inquiries are scored
Inquiries don’t count as much as payment history, revolving utilization and other factors that contribute to the calculation of a credit score. The actual impact of an inquiry can vary according to your credit history. If you have few accounts or a short credit history, inquiries can cost more points. The amount of points deducted may not be the same for each additional inquiry, as they might be scored in ranges. Past a certain threshold, the consumer could max out on the damage from numerous credit checks. Hard inquiries stay on credit reports for two years, but the length of time they impact the score depends on the scoring model (or credit bureau) used.
Multiple inquiries generated when rate-shopping for a mortgage, auto or student loan are consolidated by credit scoring models when done within a certain window of time. The FICO scoring model ignores multiple mortgage, auto and student loan inquiries in the 30 days prior to scoring but if shopping for all 3 in that window of time will alert lenders you are shopping for high priced items and reduce your score significantly. Stay off the new car lot when shopping for a home.
If you consider keeping credit inquiries to a minimum while shopping for a home loan you should be safe not to do any harm that will significantly impact your ability to get a quality mortgage. If you have questions or comments please contact me at Ingrid.firstname.lastname@example.org or visit my website http://www.scottsdalemortgageexpert.com