How Does Applying for Credit Affect Your Credit Score?

Inquiries

Applying for credit--whether a loan or a credit, or some other form of credit--does not itself affect your credit score. However, the application leads to official "inquiries," which can affect a credit score depending on quantity and frequency. There are generally two types of credit inquiries: soft and hard. Soft inquiries are not initiated by you, and do not affect your score at all. These are simply inquiries made by outside businesses that are looking to sell a product or service to people, usually credit-oriented. If your credit score meets certain criteria, then they mail you information, like a credit card or some other "pre-approved" offer.

Voluntary Inquiries

When you order a credit score report, all these soft inquiries appear on it, but lenders will usually only see the voluntary or "hard" inquiries, which interest them much more. When you apply for some type of credit, most lenders will began by making an inquiry into your credit situation. This shows them your credit history and how dependable you are at making payments, along with how well you can make payments based on your income. This inquiry stays on your credit report permanently, and is one of the things lenders look for when they conduct their own inquiries.

Now, not even these inquiries can lower your credit score, depending on what your financial situation looks like. If your credit history is strong and you have a clear ability to pay off debt, then inquiries will not drop your score. On the other hand, if you have little credit history and not many credit accounts, then inquiries will carry more weight and will probably drop your score by a few points.

Perception

However, a more subtle change is also at work. Inquiries generally stay on a credit report for two years, while those made in the last year affect the score. However, lenders will see the full two years worth of inquiries, and this will tell them many things about your credit history. For instance, if a lender sees several inquiries on your report in quick succession but no new accounts, they will know that you tried to apply for credit from other institutions and were either refused, or decided to try someone else with better rates. This will make the lender uneasy, and may cause him to make a worse offer or decline to give you credit. This may occur despite your credit score, since this history of inquiries can act as a "silent" story of your credit history.

Fortunately, most credit score calculations group like credit inquiries together within a period of time, so if you are shopping around for a good auto loan report, only one primary inquiry for an auto loan will appear on your credit score.