Your Credit Score #5

Dec 9, 2014 by

financial puzzle pieceIf you’ve slogged through the first four installments of my 5-part series on boosting your FICO® credit score, you’re 90% of the way to the goal of understanding how what you do affects your credit rating (and your credit rating is a big deal, even if you’ve no plans to borrow money). We’ve covered so far payment history (35%), credit utilization (30%), age of credit (15%), and credit mix (10%). That leaves only the final piece of the credit score puzzle: new credit & credit inquiries. Accounting for 10% of your score, new credit & credit inquiries aren’t a huge factor, but since they are a piece where you can needlessly make mistakes that would negatively affect your score, learning about managing your new credit & credit inquiries is worthwhile.

What’s a Credit Inquiry?

Though we give our permission (often in the small print few of us read), many of us probably don’t realize all the times we’re authorizing a third party to access our credit report and the potential affect on our credit score of such an “inquiry.” This may sound paradoxical, but companies that formulate and sell credit scores consider an abnormal (whatever that may mean) number of credit inquiries, particularly over a relatively short time period, to be an indicator of higher-than-average credit risk.

I guess the logic is this: If a consumer is applying to many places to borrow cash, perhaps that’s a sign of financial desperation or being turned down for loans. FICO says that “people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports.”

Did you know that credit inquiries show up on your credit report for two years? Other credit scores may differ, but the FICO score considers only inquiries you made during the past year. Also, FICO ignores these types of inquiries:

  • You access your own credit report or score
  • Inquiries made by lenders in advance of a “pre-approved” credit offer
  • Inquiries made by employers

The FICO score is also geared to not penalize people who are rate shopping for, say, a mortgage or student loan. If you’re applying over a compact time period (FICO recommends 14 days) for the same loan from several different sources, your score shouldn’t be dinged.

New Credit

The “new credit” part of this score component is pretty straightforward. FICO says that its “research shows that opening several credit accounts in a short period of time does represent greater [credit] risk—especially for people who do not have a long established credit history.” The takeaway here is to be careful about opening new credit accounts you don’t really need. The grocery store where I shop employs one person who constantly prowls the aisles with a clipboard. She has solicited me innumerable times to apply for a store credit card. Of course she highlights the card’s alleged benefits. I don’t need the card, but if I succumb to her sales pitch, my credit score may take a hit. Serial credit card account balance transferring can have a similar affect. You might be shooting yourself in the foot chasing that new, low, but temporary rate (and in more ways than hurting your credit score!). Think carefully before you sign up for a new account to get a perceived and usually short term benefit.

That’s it! Now got out there and maximize your credit score!

For everything you need to know about managing your FICO® credit score, read the Tips sections beginning on page 8 of this free download:

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  1. Joseph Hogue

    Great post Kurt. I know a lot of peer lending investors that will not loan to borrowers with more than one or two credit inquiries within a six month period. Definitely a factor on your credit score.

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