A person's credit score, sometimes called his FICO score, is a measure of his creditworthiness in the eyes of creditors. Credit reporting companies determine an individual's credit score using information related to his lending history. Information that suggests a person will pay back his loans on time boosts his score, while negative information pulls it down. This report is available to many lenders. Inquiries made by certain lenders will pull a person's credit score down slightly.
Hard Inquiries
Two types of inquiries are made into an individual's credit report by lenders -- hard and soft. Only hard inquiries will pull down an individual's credit score. A hard inquiry is an inquiry made by a creditor who has received an application from an individual seeking a new loan or a new line of credit. When these lenders check the person's credit report, these inquiries are themselves noted on an individual's credit report. A hard inquiry will pull down a score by several points.
Soft Inquiries
Soft inquiries are inquiries made by lenders or other institutions who have not received an application from the individual for new credit. Soft inquiries can be made by a number of parties, including lenders who are considering soliciting a borrower and want to check her credit history first; by landlords investigating a prospective tenant's lending history; and employers who are researching a job candidate's financial history. Soft inquiries have no effect on an individual's credit score.
Effects
Generally, hard inquiries will cause an individual's score to drop only several points out of a total score that can range from 300 to 850 points. According to the Fair Isaac Corp., who developed the scoring model for the FICO score, a number of similar hard inquiries made within a short time will only count as a single inquiry. This is because the credit reporting agencies interpret this as a sign that the individual is shopping around for a loan and not considering taking out multiple loans or lines of credit.
Explanation
It may seem odd that a credit reporting agency will penalize an individual for seeking a new line of credit. However, this is because credit reporting agencies formulate scores on the perceived likelihood that an individual will default. When an individual applies for a new loan, it suggests that she may be experiencing financial difficulties. In the eyes of credit reporting agencies, this means she has a modestly increased likelihood of defaulting -- causing her score to drop slightly.
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