Typically, inquiries have a very small impact on your credit score. In a credit scoring model, there are other stronger indicators of future payment performance, such as delinquencies and payment history, balances owed, and the length of time you have used credit. Inquiries usually carry the most weight if you have a limited credit history or if there are other existing issues such as late payments or high debt. Inquiries are rarely, if ever, the only reason for poor credit scores or being declined for credit. You should, however, limit the number of inquiries you authorize whenever possible.
Why do credit inquiries affect my credit score?
Lenders are interested in inquiries because multiple inquiries are an indication that you are requesting new credit. The credit scoring agencies have found that borrowers who request credit frequently tend to be higher risk borrowers. Thus, frequent inquiries on your credit report that result from frequent requests for new credit (credit cards, loans, etc.) can lower your credit score. (The lower your score, the more risk the lender sees in lending to you.)
What is Rate Shopping?
Credit reporting agencies understand that borrowers need to shop around to find the best loan, which can create multiple inquiries in a short time. To address this, the scoring formula doesn’t penalize borrowers for shopping around. The score is set up to take into account that even though you are looking for only one loan, multiple lenders may request your credit report. Here’s what Fair Isaac, the company behind your FICO score, says about rate shopping:
“The score ignores all mortgage and auto inquiries made in the 30 days prior to scoring. So if you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping. In addition, the score looks on your credit report for auto or mortgage inquiries older than 30 days. If it finds some, it counts all those inquiries that fall in a typical shopping period as just one inquiry when determining your score. For FICO scores calculated from older versions of the scoring formula, this shopping period is any 14 day span. For FICO scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span. Each lender chooses which version of the FICO scoring formula it wants the credit reporting agency to use to calculate your FICO score.
Does the formula treat all credit inquiries the same?
No. Research has indicated that the FICO score is more predictive when it treats loans that commonly involve rate-shopping, such as mortgage, auto and student loans, in a different way. For these types of loans, the FICO score ignores inquiries made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping. In addition, the score looks on your credit report for rate-shopping inquiries older than 30 days. If it finds some, it counts those inquiries that fall in a typical shopping period as just one inquiry when determining your score. For FICO scores calculated from older versions of the scoring formula, this shopping period is any 14 day span. For FICO scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span. Each lender chooses which version of the FICO scoring formula it wants the credit reporting agency to use to calculate your FICO score.