The world of credit: New inquiry impact on credit scores defined by FICOJohn HudockCredit scoring Many of your clients will ask, "What exactly is a credit inquiry?" A credit inquiry is an item listed on a credit report that shows the date and name of a business with a permissible purpose that is defined under the Fair Credit Reporting Act. This business has previously requested a copy of the credit report. These inquiry requests are maintained in your credit profile for 24 months but are listed on your credit report for the following 90, 180 or 365 days, depending on the credit report reseller. Excess inquiries appear under the risk factors on credit reports, even though there are no actual inquiries listed on the credit report, simply because they are out of the three- to six-month recorded time period. The myFICO Web site (www.myfico.com) indicates that new credit makes up 10 percent of your credit score. New credit is made up of these four items: • Number of recently opened accounts and the proportion of these accounts by type of account. For example, three new credit cards will lower your credit score more than three other types of accounts. This is only for about 90 to 120 days. • Time since an account was opened. The degree of deduction considers the type of account, with revolving accounts having the highest deductions. This is indicated by the months reviewed. It appears that the first 90 days have the highest deductions, then 12 months, 24 months and 60 months. There does not appear to be any impact after 60 months. • Number of recent credit inquiries. This is now a minimal deduction. FICO has reduced the penalty for consumers seeking the best deal for their purchases. • Time since the credit inquiry was made. I accessed the credit scores of 12 credit reports, attempting to trigger the mechanism that would change the scores for recent inquiries. This was the only change that I made to the reports that did not change any of the credit scores. Either the FICO simulator is not accurate, or there is very little impact on the credit score. I have found that you must re-establish a positive credit history to overcome any past payment problems. The only types of accounts that will increase the credit score are revolving accounts. With low scores, you would probably only qualify for secured cards. You need a minimum of two cards. In addition to new credit, according to FICO, your credit score is calculated from data that can be grouped into four other categories. The percentages of each category reflect how important each of the categories is in determining your score: • Payment history = 35 percent • Amounts owed = 30 percent • Length of credit history = 15 percent • New credit = 10 percent • Types of credit in use = 10 percent If anyone attempts to explain credit report scoring using this category method, it is my opinion that he is intentionally misleading you or he knows very little about credit scoring. In addition to the fact that you can't get an increase in a credit score using just these categories, they also fail to include the single most important part of any credit report, which is the need for tradelines paid as agreed, never 30 or more days late and active for a specific length of time. It is simple; there is positive credit and negative credit. If you have sufficient positive credit, your credit score will be high. If you have more negative credit, your score will be low. I have never viewed a credit report separated into the percentages illustrated by FICO—this is not for the professional involved in credit. For those professionals who need a defined explanation of credit, these categories and percentages just do not work. These percentages are based on the importance of the five categories for the general population. For particular groups, for example, people who have not been using credit for a long time, the importance of these categories may be somewhat different. The categories may have an importance, but the percentages are not relative to the majority of credit reports. In fact, injecting the concept of categories and percentages into increasing any credit score will only confuse the real methods that will positively impact the credit score. The Federal Fair Credit Reporting Act § 604 Permissible purposes of consumer reports (15 U.S.C. § 1681b) virtually allow FICO and the other repositories the right to sell your credit report to anyone showing a business need for a copy of the report. Not all inquiries will reduce your credit score. When you check your credit report, you may notice that a number of credit inquiries have been made, sometimes from businesses that you don't recognize. According to FICO, the only inquiries that count toward your credit score are the ones that result from your own applications for new credit. Inquiries that count toward your credit score There is only one type of credit inquiry that counts toward your score. When you apply for a mortgage, auto loan or other credit, you authorize 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 credit score. Inquiries that don't count toward your credit score Your own credit report requests, credit checks made by businesses to offer you goods or services or inquiries made by businesses that you already have a credit account with do not count toward your credit score. You have the right to stop these inquiries by electing to opt out. Credit checks by prospective employers also do not count. These types of inquiries may appear on your credit report, but they are not included in your credit score, according to myFICO, December 2005. The three major credit bureaus may have different requirements on how to opt out. You can write your own letter or use a sample opt-out letter to request that your personal information not be shared with others or used for promotional purposes. The three national credit bureaus offer a single toll-free number that enables consumers to opt out of all pre-approved credit offers with just one phone call. Call (888) 567-8688 for more information or to opt out. Your credit score is not affected when you check your credit. Checking your credit reports regularly to be sure they are accurate and error-free is a good idea. In fact, maintaining accurate credit reports is a part of good credit management, which can help to improve your scores over time. How to order your free annual credit report Do not contact the three nationwide consumer reporting companies individually. They have set up one central Web site, www.annualcreditreport.com; a toll-free telephone number, (877) 322-8228; and a mailing address where you can order your free annual report. Complete the annual credit report request form and mail it to: Annual Credit Report Request Service P.O. Box 105281 Atlanta, GA 30348-5281 More information on inquiries from myFICO The score does not count consumer-initiate inquiries—requests you have made for your credit report in order to check it. It also does not count promotional inquiries—requests made by lenders in order to make you a pre-approved credit offer, or administrative inquiries—requests made by lenders to review your account with them. Requests that are marked as coming from employers are not counted either. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score. Inquiries are part of the new credit category. Their importance depends on the overall information in your credit report. For some people, a given factor may be more important than it is for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score. What's important is the mix of information, which varies from person to person. Inquiries may or may not affect your score. A credit score takes into account only voluntary inquiries that result from your application for credit. FICO claims that its score does not take into account any involuntary inquiries made by businesses with which you did not apply for credit, inquiries from employers or your own requests to see your credit report. For many people, one additional credit inquiry (voluntary and initiated by an application for credit) may not affect their score at all. For others, one additional inquiry would take less than five points off of their credit score. However, inquiries can have a greater impact if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk—people with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports. What happens when you apply for credit? When you apply for credit, you authorize the lender to ask for a copy of your credit report. This is how voluntary inquiries appear on your credit report. The inquiries section of your credit report contains a list of everyone who accessed your credit report within the last two years. The report you see lists both voluntary inquiries spurred by your own requests for credit, and involuntary inquiries, such as when lenders order your credit report to offer you a pre-approved credit card. Will my FICO score drop if I apply for new credit? If it does, it probably won't drop much. If you apply for several credit cards within a short period of time, multiple inquiries will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score. What to know about rate shopping Looking for a mortgage or an auto loan may cause multiple lenders to request your credit report, even though you're only looking for one loan. To compensate for this, the score counts multiple auto or mortgage inquiries in any 14-day period as just one inquiry. In addition, 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. FICO and the repositories claim that the credit score range is between 300 and 850. I have never viewed a score below 400, so if you find one, please fax it to me at (877) 829-5757. Please remember to cross off the name and the Social Security number. No cover sheet is required. John Hudock is president of The International Credit Club and The World of Credit, two companies specializing in credit report problems and scores. He also has online continuing education courses on credit approved by the Pa. Department of Banking and the Pennsylvania Department of Continuing Legal Education. John can be reached at (570) 829-5696 or e-mail [email protected] and 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.