What is a credit inquiry?
A credit inquiry is an item on a credit report that shows a business with a “permissible
purpose” (as defined under the federal Fair Credit Reporting Act) has previously requested
a copy of the report.
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 know. But the only inquiries
that cout toward your FICO score are the ones that result from your applications
for new credit.
There is only one type of credit inquiry that counts toward your FICO 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 FICO score.
Your own credit report requests, credit checks made by businesses to offer you goods
or services, or inquiries made by businesses with whom you already have a credit account
do not count toward your FICO score. 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 FICO score.
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 FICO scores over time.
How inquiries are factored into FICO scores.
There are five types of information used to calculate a FICO score at any given point
in time. Each type of information counts as a percentage of a total FICO score:
Payment history = 35%
Amounts owed = 30%
Length of credit history = 15%
New credit = 10%
Types of credit in use = 10%
These percentages are based on the importance of the five categories for the general
population. For particular groups, such as people with relatively short credit histories,
the importance of the categories may differ.
Inquiries are a subset of the “new credit” category shown above, which accounts for
10% of the total FICO score. Their importance depends on the overall information in
your credit report. For some people, a given factor may be more important than 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, and
for any one person over time.
Inquiries may or may not affect your FICO score.
A FICO score takes into account only voluntary inquiries that result from your application
for credit. The information about inquiries that can be factored into your FICO score
includes:
? Number of recently opened accounts, and proportion of accounts that are recently
opened, by type of account.
? Number of recent credit inquiries.
? Time since recent account opening(s), by type of account.
? Time since credit inquiry(ies).
A FICO score does not take into account any involuntary inquiries made by businesses
with whom 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 FICO score at all. For others, one additional inquiry
would take less than 5 points off their FICO score.
Inquiries can have a greater impact, however, 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.
This weblog is sponsored by Ovation Law.