So, you're thinking of getting a car loan? Maybe a mortgage home loan? Maybe a retail store credit card? Before you apply for that loan, think about this. Your credit score is one of the main factors used when a lender decides if they will loan you money. It is very important to know that having your credit report checked again and again can lower your credit score which could be the difference between getting a loan or getting denied for a loan.
Did you know? The number of recent inquiries that have been made by creditors has a 10% impact on your credit score.
Before we talk about credit inquiries, what exactly is a credit score? According to Wikipedia, your credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the credit worthiness of that person. A credit score is primarily based on credit report information typically sourced from credit bureaus.
Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. Lenders also use credit scores to determine which customers are likely to bring in the most revenue. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.
Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, landlords, and government departments employ the same techniques.
Inquiries, also known as "credit checks" affect your score for one year from the time the inquiry is made. Personal inquiries do not count toward your score. In other words, you can check your credit report as often as you like and that wont affect your score. The score is only affected if a potential creditor checks your credit. Potential creditors include credit card companies, auto finance companies, department stores and mortgage companies.
The reason that inquiries impact your credit score is because the scoring system assumes that if you have many recent inquiries, you must be strapped for money and in some type of "panic" mode, trying to get credit wherever you can find it. The system also assumes that all these inquiries will eventually result in new accounts being opened, and as stated before, the system doesn’t like you to open new accounts and punishes you by giving you a lower credit score.
Here are three practical steps that you can take to improve your credit score in this area:
1. Multiple auto and mortgage inquiries are treated as only one inquiry if made within 45 days of each other. So, it is better to shop for a car or a mortgage over a two week time-frame, rather than to prolong it over a longer timeframe.
2. Don't apply for a lot of credit or open multiple credit cards at the same time.
3. If you are thinking of applying for a mortgage within the next 90 days or so, it would be good to wait until after your mortgage closes before you apply for any new credit.
One common mistake buyers make is to write contract for a new home, then start making purchases like furniture, appliances and other home improvement items, only to find that just before closing their lender re-checks their credit score and their score has gone down. This drop in your score can lead to the lender denying the loan or possibly eliminating you from a certain down payment program leaving you to bring a lot more cash to closing than you planned for.
This final verification of employment and credit score applies to all customers in contract for a home. Whether you are building new homes in Georgia, new homes in Tennessee, or new homes in south Florida, don't make any purchases without first speaking to your lender.