Does Applying For Credit Lower the Rating?

Credit applications are part of most consumers' lives. People open new credit card accounts, apply for vehicle loans or fill out mortgage applications to buy new homes. Lenders review their credit reports or check their credit scores before opening the account or granting the loan. These inquiries are all noted by the credit bureaus and become part of the consumers' files, where they may affect future creditor decisions, according to the FICO credit score company.

Factors

Many factors go into determining a person's credit rating, including the number of accounts, current balances, credit limits and payment histories. These items are visible on the credit reports put together by the TransUnion, Experian and Equifax credit bureaus, and they are used by FICO and other credit score compilers to calculate scores that indicate whether the person is a good risk for a loan or credit card. Inquiries by lenders evaluating credit applications also go onto credit reports and get figured into scores, according to FICO.

Types

Credit inquiries come in two different types. One is called a soft inquiry, and it happens when businesses check credit to make promotional offers to consumers, when one of a person's current creditors looks at the records, or when people check their own credit reports. Soft inquiries have no affect on credit ratings, according to FICO. Hard inquiries are credit report reviews that result from applications for new loans and accounts. FICO explains that hard inquiries sometimes lower the credit rating.

Effects

Hard inquiries often have little or no affect on a person's credit rating. The credit score drop caused by a single inquiry should be less than five points for most people. Consumers with a short credit history, or those who apply for many different accounts within a short time span, can see a bigger drop. Inquiries show up on credit reports for two years, according to Bankrate financial site columnist Don Taylor. They lose their impact as time passes and disappear completely at the end of that period.

Purpose

Credit ratings drop when people seek many new accounts because such people pose a greater statistical risk for defaulting on credit cards and loans. FICO notes that people with six or more hard inquiries on their credit files are eight times more prone to filing bankruptcy than consumers with no inquiries at all.

Considerations

Some consumers shop around for the best deals on major financial transactions like car loans and home mortgages. They may fill out several credit applications within a few weeks as part of the process. FICO's credit score formula allows for loan shopping and considers multiple inquiries that happen with two weeks as a single credit check.