Even if you know relatively little about how FICO scores work, you've most likely heard that when your credit is pulled it hurts your scores. I've actually found this to be the primary reason people avoid applying for new credit. In fact, friends often ask me how I manage to apply for so many of the rewards credit cards I rate and review on Creditnet.com. Shouldn't all those credit inquiries be killing my FICO scores? Well, they haven't, and I frankly don't worry about credit inquiries that much. While there's no doubt in my mind too many inquiries can hurt FICO scores, I think most of us overestimate just how big of an impact credit inquiries have on our scores.
A Common Predicament
For example, take this conversation I recently had with a close friend of mine. We'll call him "Mark" to protect his identity. Mark is planning to buy a new home before the end of the year. He also has his eye on a new airline miles credit card, which is currently offering a lucrative sign-up bonus worth several hundred dollars in free travel. While researching all the card's benefits, Mark did some quick math and figured out that he could score enough points with the sign-up bonus to fly with his wife and kids to their family reunion this year for free. As he explained his situation to me, I was sitting there thinking, "Why haven't you applied for the card yet? This decision should be a total no-brainer!" But here's the problem Mark is struggling with at the moment. He doesn't want to risk lowering his credit scores by applying for the card because he's afraid he might not be able to land the best interest rate and terms when applying for a mortgage later this summer. This is a legitimate concern I hear from consumers all the time, and I completely understand why the fear exists. What I've discovered over the years is that it's deeply rooted in the following 5 credit inquiry myths:
Top 5 Credit Inquiry Myths
1.) Credit Inquiries Always Damage FICO Scores We know that credit inquiries account for less than 10% of the FICO score, but it's also possible that a single inquiry could have no effect on a person with a very strong credit history. If Mark already has good credit, there's no reason to assume that every credit inquiry is going to damage his credit scores. 2.) Credit Inquiries Hurt FICO Scores for 2 Years or Longer While hard pulls remain on credit reports for 2 years, that doesn't mean they will continue to impact Mark's FICO scores for the same amount of time. After 12 months, the FICO credit-scoring model will no longer consider a hard inquiry. 3.) Rate Shopping Kills Credit Scores FICO has no intention of penalizing Mark for being a savvy consumer. In fact, FICO has said that their newest model counts credit inquiries for mortgage or auto loans as one inquiry if they are made within 45 days. Older versions of the model might only group inquiries made within a 14-day time period. If Mark times his rate shopping so the credit inquiries all happen together, he shouldn't have to worry about it negatively impacting his FICO scores. 4.) Checking Your Own Credit Hurts FICO Scores This is one of the most common credit myths out there. Unlike the "hard pull" that is performed when Mark applies for credit, checking his own credit is considered a "soft pull" and has no impact whatsoever on his FICO scores. 5.) Every Hard Inquiry Docks 5 Points from FICO Scores According to FICO, "If an inquiry does impact a score, it’s typically by a small amount—less than five points, on average." So what do you think I told Mark after he shared his concerns with me? I told him he'd be missing out on a great opportunity to land a free vacation because he was simply afraid to lose a few points on his FICO scores. And since he already has great credit, it's quite possible that the credit inquiry will have no effect on his credit scores WHATSOEVER. Furthermore, even if it does impact his scores, he most likely wouldn't lose more than a few points before his credit scores QUICKLY recovered again. As long as Mark wasn't planning on applying for the new mortgage within the next couple of months, I told him to go for it and enjoy the free vacation with his family. That's exactly what he did, and his credit scores have fared just fine.
FICO Shares New Facts About Credit Inquiries
According to a blog post published by FICO a few months ago, "57% of consumers score the maximum number of points for inquiries; that is, inquiries are not a factor for at least 57% of consumers." In addition, ONLY 14% of consumers lose more than 10 points because of credit inquiries and just 4% lose more than 20 points. I find these statistics quite revealing. For most of us, credit inquiries are a non-factor in our FICO scores. For others, a few points here or there might be lost while a very small percentage of consumers are losing more than 20 points. I'm not saying you should completely ignore the impact of credit inquiries on your FICO scores. I'm also in no way suggesting that anyone with good credit start applying for a new rewards credit card or two every month. What I am suggesting is that you take a step back and think about how important credit inquiries are when compared to everything else that impacts your FICO scores, such as payment history, credit utilization, length of credit history, and your credit mix. If you do, you'll see that while credit inquiries can have a small impact on FICO scores, there are plenty of other more important factors that deserve your attention first. Photo by Roberto Bouza