Has the lending world scared you into believing your credit score is your whole meaning in life? Obviously, it isn’t, but it does play a very important role in key areas of life, and some may surprise you. Credit scores could determine insurance rates, employment, opening a bank account, and of course, borrowing money. Scores are especially important in mortgage lending. There are several factors which make up a credit score; credit inquiries being one of them.
A credit inquiry means a company or person is “pulling” your credit report. Although there are more important factors, credit inquiries generally contribute to 10% of the overall score. Therefore, credit inquiries do matter. This includes someone looking to get an 800 credit score. Furthermore, it could include someone that needs just a few points for loan approval.
Russell Smith, Operations Manager of the Southern Region for OVM Financial has a quote that says it all. “Everyone has a number, so you might as well have a good one!” Let’s discuss types of inquiries and how they affect mortgage approvals or life.
Types of Credit Inquiries
Credit inquiries are basically broken down into 2 main groups: “Hard inquiries” and “soft inquiries.” “Hard inquiries” may affect a credit score, while “soft inquiries” do not affect a score. So it is important to know who is pulling what. There are 4 types of hard and soft inquiries:
- Account Review Inquiries – Soft
- Promotional Inquiries – Soft
- Standard Inquiries – Hard
- Self-Pull Inquiries – Soft
Account Review Inquiries
Insurance companies and employers often pull these credit inquiries. This report only displays negative information. These include late payments, judgments, bankruptcies, or foreclosures. Companies look at this report to determine your financial strength and your risk. Statistics show that more credit issues mean that there’s a higher risk in other areas. Employers in the financial sector or a high-security clearance area take this report very seriously, but in most areas, it is not a primary reason to insure or hire. Although, it does play a role.
Affect on your mortgage approval. This type of credit inquiry will not affect your credit score or your mortgage approval; so it is a soft pull. Often during the mortgage process, you will hear us say “do not apply for more credit prior to closing,” but a homeowner’s insurance inquiry is often necessary (and definitely okay) for your mortgage approval. Do NOT change jobs during the mortgage process. Believe it or not, buyers do this more than you would think.
This type of inquiry is purely for knowing someone’s credit score, as it will not display any details or makeup of the credit score. Credit card companies, banks, furniture companies, or anyone else looking for a certain type of client uses these. Rather than shotgun a marketing campaign to everyone, companies are able to narrow down their target market.
Affect on your mortgage approval. The public has no control over these inquiries, so it obviously would not affect a credit score. Promotional inquiries will not show up on a credit report. By the way, have you ever wondered why you get so many phone calls or mailings after applying for credit? The credit bureaus sell your information to companies. This is called “trigger leads.” If you apply for a car loan, this activity is sold to lenders and you will receive marketing. Since you have applied for credit, you are considered a hot lead.
This credit inquiry is self-explanatory. It is the individual pulling his or her own credit reports. There are many services that offer one or more of the credit reports for free, but there are some tricks. Watch out for the ones that make you pay for a service to get a credit report. It is very important to check your credit each year. Check out this article which explains how and why.
Affect on your mortgage approval. Since this is not a 3rd party pull, it does not affect your mortgage approval at all.
These credit inquiries are a hard credit pull, so it affects your credit score, but as long as you understand this area, it will have a minimal to no effect on your credit life. Basically, use them in moderation. Obviously, to open a credit account with a lender, someone has to pull your credit. Therefore, it is important to do your homework and determine if the inquiry is creditworthy. Because standard inquiries will affect a credit score, be wary of applying or opening accounts often. MyFICO.com states “Large numbers of inquiries also means greater risk. Statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries.”
Especially watch out for this statement during the holidays! “If you open a charge card with us, you will save 30% off of your purchase today.” Sound familiar? This article explains what this may do to your credit score.
Multiple credit inquiries will not always affect your scores negatively. Certain credit inquiries are looked at as one. Examples include shopping for a mortgage, auto, or student loan over a short period of time. There are many scoring models so the “shopping” range varies from 14 – maybe 45 days. Keep in mind that credit card or finance company inquiries are considered multiple inquiries so they could hurt scores.
Affect on your mortgage approval. Standard credit inquiries could play a huge role in a mortgage loan approval. First of all, once you have applied for a mortgage loan, stop applying for new debt! As mentioned, the credit score impact is not as bad as late payments or high balances on cards. But new credit inquiries could cause the following:
- Lower credit score
- Determine if a new account was opened
- Prove terms of new loan or card
- Higher debt to income ratios which could affect loan approval
- Higher rates because of a lower score or higher debt ratio
Though credit inquiries account for about 10% of a credit score, it could play a major role in your credit score and chance of approval.