Credit reports gather much of your financial information into one place, letting potential lenders, landlords or employers get a sense of your ability to handle credit wisely. Because of the complexity involved with collecting and reporting large volumes of information about your credit history, including individual loan accounts, earned income and payment history, what makes your credit report score drop off or improve might seem confusing. Consumers must sort through misconceptions to learn whether credit inquiries might damage their credit report.
Credit Scores
When people talk about their credit report "dropping off" or improving, they're usually referring to their credit score. Credit scores may appear as part of your credit report, but not all credit reports contain your score. Credit scores summarize various elements of your credit history into one number indicating your creditworthiness. High credit scores might indicate low debt levels compared with income, on-time payments, payments made over the minimum amount and long, reliable relationships with lenders. Low credit scores might indicate high debt levels compared with income, late payments, regular payments of just the minimum amount due and frequent account openings and closings.
Credit Inquiries
When you apply for credit (such as opening a new credit card) this authorizes lenders to run a credit inquiry into your credit history to determine whether they feel comfortable approving your application. These credit inquiries may appear on your report as part of your credit history, even if you do not end up taking out the loan for which you applied. Another type of credit inquiry, considered a "soft" inquiry, happens when credit card companies tap into your credit report to decide whether to offer you an account without approaching you first. You'll know this has happened when credit card offers arrive in the mail. Soft inquiries have no affect on your credit report; neither do inquiries that you run on your own credit report. In fact, it's recommended that you occasionally run your own credit report to find and correct errors and to help discover identity theft.
Dropping Credit
Credit inquiries can cause a small drop-off in your credit report score because excessive inquiries might indicate that you're frantically trying to increase credit availability. For most people, a credit inquiry may cause a five-point drop in their credit score, which has a scale that runs from 350 to 800 points. Last-ditch efforts to secure credit and stave off financial crises can indicate poor money and credit management skills. Creditors want to stay away from these types of situations, since they want to reduce the risk that you'll apply for credit, burn through the credit and never repay. It's true that opening several additional credit lines may hurt your credit, causing your score to drop more substantially.
Reality Check
It's understood that people will sometimes receive multiple inquiries into their credit during the process of taking out an auto loan, mortgage or student loans. When multiple inquiries arrive all at once for the same credit account within a certain amount of time, they're treated as a single inquiry and may have only an insignificant effect on your credit report. Typically, multiple inquiries occurring within 30 days are treated as one credit inquiry on the assumption that you're rate-shopping for loans.
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