The world of credit: Why are lenders concerned about inquiries?John J. Hudockcredit scores, credit inquiries, risk, FICO score, Fair Isaac
Lenders consider an inquiry to be a request for credit. However,
some inquiries are not. Ideally, everyone would have sufficient
income to pay for their wants. Credit would only be used for
higher-priced items such as mortgages, automobiles, etc. To be
financially sound, you should not purchase any of these items
unless you have approximately 20 percent to apply towards the
purchase price. What has been happening in the real world is that
individuals disregard the impact of making payments each month and
how this actually affects their lifestyle in the long term.
Generally, individuals do not make any inquiry for credit unless
they are in need of additional financing; the more inquiries, the
more potential debt they probably have. Realistically, there are
more inquiries on each credit report than the consumer actually
requests. Excessive inquiries can indicate potential problems.
According to FICO, bankruptcy becomes eight times more prevalent
for individuals with six inquiries or more on their credit reports.
FICO claims that the only inquiries that count toward your score
are those resulting from your applications for new credit.
At one point, credit scoring reflected almost immediate
deductions for each inquiry. FICO has now indicated a specific
formula for measuring the risk impact on inquiries. Fair Isaacs Web
site, www.myfico.com, clearly states that your FICO score counts
multiple auto or mortgage inquiries in any 14-day period as just
one inquiry. More importantly, the score does not include any
deductions for any inquiries for all mortgage and auto loans made
in the 30 days before scoring. If you are able to close a loan
within 30 days, the inquiries made during that period should not
affect the score.
This information from FICO might be new for mortgage brokers and
bankers. We all have had a customer who wouldn't allow us to look
at their credit report because they "heard from a neighbor" that
their scores would go down greatly if they allowed someone to pull
their reportthus disallowing their application for a mortgage
approval due to greatly lowered scores. If FICO's statement is
correct, then there is less effect on the credit score than in the
The Federal Fair Credit Reporting Act (FCRA) Section 604,
"Permissible Purposes of Consumer Reports" [15 U.S.C. §1681b],
virtually grants FICO and the other repositories the right to sell
your credit report to anyone showing a business need for a copy of
the report. Fortunately, when anyone requests a copy, the
repository must indicate on the report that an "inquiry" was made,
the name of the business making the inquiry and the date. This
information is recorded for two years. Most credit reports list the
inquiries for the past six months, although FICO considers the
inquiries a risk for the past 12 months. This is why the "excessive
inquiries" appear under the risk factors on credit reports, even
though there are no actual inquiries listed on the credit
reportthey are passed the six-month recorded time period.
Certain types of inquiries lower your credit score. Therefore,
we must separate the inquiries into those that affect the credit
score and those that do not. The only inquiries that count toward
your FICO score are those that come from your requests for new
credit. When you apply for a mortgage, auto loan or other credit,
you allow the lender to request a copy of your credit report. These
types of inquiries, prompted by your own actions, appear on your
credit report and are included in your FICO score.
Inquiries that don't count toward your FICO score are made by
businesses to offer you goods or services, or inquiries made by
businesses with whom you already have an existing credit account.
Also, inquiries by potential employers do not reduce your score.
These will be on your credit report, but FICO claims they are not
included in your credit score.
I suggest that you begin to check your credit reports using the
new Fair Credit Reporting (FACT) Act as soon as it is available.
You do not affect your FICO score when you check your own credit.
Obtaining a free credit report via the FACT Act (available this
December in the western U.S. and moving east until December 2005)
is a way for you to check your report for accuracy and fraud.
Then there are creditors who have "permission" to periodically
review the credit reports of their account holders. These inquiries
do not affect your credit score, but appear to look bad on your
FICO lists "inquiries" as part of the "new credit" category,
which accounts for about 10 percent of the total credit score. As
with each of the other categories, their importance is dependant on
the entire credit report. A specific factor may be more or less
important with a different credit history.
Depending on the credit report reseller, each credit report
contains a list of inquiries from everyone who received information
or accessed your credit report within a 90 to 180 day period. The
XML file sent to the reseller by the credit reporting agency
contains all inquiries for the last two years. The report you see
lists all types of inquiries. You only receive a complete list of
the inquiries if you request it.
Credit bureaus are stopping the investigation of disputed
inquiries. They are telling consumers that inquiries are just a
"statement of fact." If you are not satisfied with the inquiries
remaining on a credit report for between one and two years,
consider that according to the FCRA, any information that is
disputed on your credit report must be investigated. The next
consideration is your right to "opt out." You can notify the three
major credit bureaus that you do not want personal information
about you shared for promotional purposesan important step toward
eliminating unsolicited mail. Send your letter to each of the three
major credit bureausEquifax, Experian and TransUnionat the address
listed on their Web sites.
The national credit bureaus offer a toll-free number that
enables consumers to "opt-out" of all pre-approved credit offers.
For more information, contact the Federal Trade Commission at (888)
5-OPTOUT or call (202) FTC-HELP.
John Hudock is president of The International Credit Club
and The World of Credit, two companies specializing in credit
report problems and scores. He can be reached at (570) 829-5696 or
e-mail [email protected]
John invites e-mails on any credit topic. He
will answer each one and publish any that will benefit his readers.
Please be specific with your questions.