Credit Inquiries and Credit Scores

Credit score report is an important basis when you apply for loans or credit lines.  Credit score rating as calculated through your credit score report determine how much you can borrow and how much you will have to pay. The higher the score, the likely you’ll be granted a loan.  It’s vital to your finances as this dictates how much you can save from interest rates.

Credit inquiry is an important factor in determining your credit score interpretation. To be exact, it’s 10% of your score. These are inquiries made by business for which you apply for loans. They are monitored in your credit score report but take note that not all inquiries count.  Only voluntary inquiries count against your score and appear in your credit score report. This includes all inquiries resulting from new credit applications initiated by you. Inquiries such as own credit report requests, pre-approved credit inquiries by these companies, and credit checks by your prospective employers don’t count to your FICO credit score.

Voluntary inquiries made by business should be guided also by reasons as enumerated in the Fair Credit Reporting act such as granting credit, collecting debts, underwriting insurance, employment purposes, license issuing and legitimate business transactions. Other than such reasons, businesses who inquire on your credit score report are already violating the federal law.

Studies show that multiple credit inquiries do reduce your credit score since it is interpreted to mean a high risk of default. So how does it really affect your score? FICO credit score are calculated based on five categories: payment history (35%), amount owed (30%), length of credit history (15%), new credit (10%) and Types of credit in use (10%).  Inquiries that fall into the “new credit” category includes information on the number of your newly opened accounts in proportion to the type of account, number of credit inquiries, and time intervals for new account openings and credit inquiries.

This can bring great impact to your credit score since many inquiries translates to higher risks. It is said that borrowers with more than six inquiries are likely to be bankrupt. It indicates your risk as a borrower and may mean that you have too much debt or you’re into financial trouble. Take note that credit inquiries for the past two years appear in your report but only the last year is computed in your FICO credit score.

To improve your credit score and get that 760 to 850 rating, make sure that when you shop for rates, spread it in as long as 30 days. This way, it can be distinguished when you are searching for a single loan or multiple loans. Typically, multiple inquiries for auto or mortgage application in a short time span is considered a single inquiry and will not decrease your credit score significantly. 

To raise credit score, there are some ways that a borrower should practice – pay bills on time, keep a low balance on credit cards, apply only for new accounts as needed, re-establish credit history, and checking regularly your own credit score reports. Through this, your credit score can significantly increase and thus, lower your interest rates, speed up your credit approvals, reduced deposits on utilities, and get approved for apartments, credit cards, auto loans and mortgages.

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In conclusion, 10% of your FICO credit score is voluntary inquiries by new credit grantors and the higher the frequency of voluntary inquiries, the lower your credit score rating and the higher the risk that you are likely to default and not granted with your intended borrowing.