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.
