How Inquiries Affect Credit Score Per Inquiry

Of all the negative items a consumer can have on a credit report, credit inquiries -- when a third-party or the consumer requests a credit file from one of the national credit bureaus -- usually do the least amount of damage. That doesn't mean they have no effect. Having too many inquiries on your credit report can cause a low credit score and rejection for a loan. Not all inquiries cause damage, but even those that do not can prevent access to credit.

Identification

Each inquiry does no more than five points of damage in the FICO system, according to the Fair Isaac Corporation. Also, while credit bureaus only report inquiries for two years, the FICO model only counts them during the first year. However, once the borrower accrues more than six voluntary credit inquiries -- such as from a loan application -- in a twelve-month period, the inquiries can collectively do more than five points in damage each.

Soft Inquiries

Involuntary credit checks -- called a soft inquiry -- are legal by some parties, such as "pre-approved" credit card issuers. Soft inquiries do not directly damage your credit, but can reduce access to credit, because lenders often run a soft report periodically to determine if the company wants to increase a borrower's credit limit or send out new offers. Since the FICO risk model factors in the outstanding debt to total credit limit available -- or credit utilization ratio -- on revolving accounts, a creditors decision to not increase, or to decrease, your credit limit could affect your score. A borrower with $500 in credit card debt and a $1,000 limit has a utilization ratio of 50 percent. A $2,000 limit increase during an account review would drop the utilization ratio to 16.7 percent.

VantageScore

The VantageScore system is a model developed by the major credit agencies to compete with the FICO formula. Some major credit card issuers already use VantageScore scores along with FICO scores. Inquiries carry more weight in the VantageScore model, because trends from the 2006 to 2009 recession showed that applying for and opening new lines of credit are a more significant risk to lenders than in the past, according to Lynnette Khalfani-Cox of Wallet Pop.

Tip

Most borrowers will see no drop in their credit score if they have a single inquiry on their report, two might have no effect either. Thus consumers should not apply for credit more than once or twice a year and only if they need a new loan. Also, all consumers should pull their report and look for unauthorized inquiries. A creditor only needs a person's drivers license to get all the information needed to run a report.