This post is the last of our series on understanding your FICO credit score, where we delve into detail to explain each component of your credit score calculation. In the first four parts of this series, we explained how payment history, amounts owed, the length of your credit history, and your credit mix all impact the calculation of your FICO credit score. In this final post, you’ll learn about the effects of applying for new credit, and the difference between hard and soft credit inquiries.
Part 5: Credit Inquiries (10%)
The final 10% of the FICO score tries to capture whether a potential borrower is at risk of dramatically increasing their debt load by looking at requests for new credit. Opening several new accounts in a short period of time can be a warning sign to lenders, especially if you don’t have a long credit history or are already maxing out your lines.
One of the most confusing elements of this portion is understanding what constitutes a hard credit inquiry, which impacts your score, vs. a soft credit inquiry, which does not.
Hard Credit Inquiries
A hard inquiry results when a potential lender makes a request for your credit score to assess your creditworthiness. This happens when you apply for a new credit card, a mortgage, an auto loan, or even a new apartment (if the landlord runs a credit check). Hard inquiries impact your score for the ensuing 12 months. According to FICO, however, the scores are designed to only count inquiries which truly impact your credit risk. In addition, only voluntary inquiries are considered.
Soft Credit Inquiries
A soft inquiry is when your score is NOT being review by a potential lender, such as when you request your own credit report, and does NOT affect your credit score. These days, many credit card companies offer free credit scores, as do Credit Karma and WalletHub which recently became the first and only to offer free credit scores and full credit reports updated on a daily basis. Checking your score through these companies will not show up as a hard inquiry in your FICO score calculation.
The FICO calculation also allows for rate shopping. If there are multiple requests for an auto loan, mortgage, or student loan, within a single 45 day period, these may be treated as a single inquiry as it’s unlikely you will take out more than one auto loan or mortgage. The same applies if you are looking for a new apartment – as long as your search falls into a single 45-day window, you don’t have to worry about multiple landlords requesting credit reports.
Finally, it is important to note that inquiries usually have a small impact – less than 5 points if you have a long credit history – and do not last very long. While you should try to avoid applying for several lines of credit in a short period, you should not let the potential impact of a single inquiry deter you from applying for credit.