FICO is the preeminent credit reporting service in the United States, with 90% of all lending decisions in the United States dictated by FICO every single day. While there’s a lot of useful information about FICO (including our recently-published eBook), one aspect of credit reporting and scoring still creates some confusion: inquiries.
So today we’ll give you the final word on credit checks and inquiries straight from FICO itself.
Defining a credit inquiry:
First off, let’s assign a clear definition to the term “inquiry” or even “credit check.” Whenever you apply for new credit – like a credit card, retail card, or even a mortgage or auto loan, you’re granting authorization for the lender to access a copy of your credit report from the credit bureaus – an inquiry. After that, this new inquiry – or authorized credit check for new loans – will show up on your credit report. You may even see inquiries from businesses and lenders that you don’t recognize but don’t worry, only those you authorized through applications will affect your FICO Scores.
Will my FICO Scores be affected when I apply for new credit?
FICO serves an essential function for millions of lenders, banks, and companies: to gauge the risk of default for a potential new loan holder. Therefore, FICO’s algorithms factor all sorts of risk factors, including when consumers apply or open multiple credit lines in a short period of time. So, if you apply for several new loans or accounts in a certain period, your FICO Scores will go down as a result.
Do FICO Scores fall rapidly when you apply for new credit?
If you just applied for a new credit card and took out an Old Navy charge card at the mall this morning, you may be biting your nails and sweating your FICO Score a little bit. But the good news is that credit inquiries usually don’t drop your scores precipitously, just slightly or incrementally. FICO isn’t looking to punish credit applicants, per se, just register the risk of taking out too much credit at once. Furthermore, they do have a system in place for consumers who are “shopping” for a loan, which we’ll cover later.
Just how much will these credit inquiries lower my FICO Scores?
FICO’s algorithms are incredibly complex – and they’re also proprietary, which means the public can’t see them and try to figure them out. But there’s no need for that since FICO does give us general guidelines and best practices for improving our credit scores. Similarly, each person’s FICO Scores may be affected differently by credit inquiries. But we do see that, in most cases, a consumer’s FICO Scores will go down less than 5 points when a credit inquiry hits their report. (To put that in perspective, FICO Scores range from 300 to 850.)
Of course, if you have several inquiries within a short time or apply for the wrong kinds of accounts, your score may drop further. Research shows that consumers with six or more inquiries on their credit are eight times more likely to declare bankruptcy, a fact that FICO is well-aware of!
Does FICO treat all credit inquiries equally?
FICO absolutely does not treat all credit checks and inquiries the same, as they differentiate between classifications of loans. For instance, credit inquiries for home loans or mortgages, auto, and student loans may not affect your score as profoundly as inquiries for credit cards, check cashing services, and retail accounts, etc. The main reason for this is because FICO understands that consumers want to “shop around” for the best rate and terms with those big-ticket items.
How FICO treats rate shopping.
For mortgages and other big-ticket loans, FICO usually doesn’t penalize consumers for those inquiries they made within a specified period, like 30 days. FICO also considers several inquiries in a short span as one inquiry, which allows consumers to consult with several mortgage lenders, auto financing options, and student loan providers, etc. For older versions of FICO, that rate-shopping grace period may be 14 days, and it’s 45 days for the newest version of FICO Scores.
What every consumer should know about rate shopping.
When you apply for a new loan, FICO does account for that potential risk, although marginally. Furthermore, FICO doesn’t discourage shopping for the best rates on significant purchases like mortgages, auto loans, and student loans, and several inquiries within a certain period – like 30 days – FICO will treat them as a single credit check and not penalize you (this timeframe is 14 days for older scoring models and 45 days for the newest version of FICO). Different lenders choose to access and use different versions of FICO, but for consumers, it’s good enough that you understand credit inquiries and keep your rate shopping to a tight timeframe.
Keeping a good credit score.
If you’ve applied for several new loans or accounts recently, your score may have taken a very slight drop – if at all. But remember that you can also proactively work to improve their FICO Scores, as well. Fortunately, we know how FICO weighs the particular factors that make up your score, including:
35% Payment history
30% Credit utilization
15% Length of credit history
10% New credit
10% Credit mix
So, by keeping your debt levels low compared to your available credit, holding well-seasoned accounts, and always paying your bills on time, you’ll see your FICO Scores on the rise, even if you’ve had credit inquiries.
For more questions about credit checks and credit inquiries or how to improve your FICO Scores, please reach out to Blue Water Credit!