As a consumer applies for a loan, he authorizes the lender to check his credit history. Several credit inquiries coming from lenders have less of an impact than several inquiries coming from credit card companies. Creditors are in the business of loaning money, but they also want to protect themselves from consumers who are bad credit risks.
FICO Score Sources
When you apply for a loan, banks and credit unions pull your credit report to check on your creditworthiness. Rather than going to only one source and obtaining one credit report, they check with all three credit bureaus. These bureaus are Equifax, TransUnion and Experian. Because each credit bureau obtains credit information from different sources--your utility companies, credit card issuers or mortgage company, your score will be different from one bureau to the next.
Credit Inquiries
You authorize lenders to ask about your credit history at the time you apply for a loan. These inquiries show up on your credit report, along with inquiries from companies you weren't aware were checking your history, according to My FICO. The only credit inquiries that count are the ones you authorized lenders to check.
Effect of Applying for Credit
When you apply for a loan and the lender requests your credit report, your score dips temporarily. When you rate shop with several lenders in a short time period, all of these inquiries will be included in your credit report. Because these credit inquiries all took place in a short period of time, the impact on your credit report is minimal. Credit bureaus typically treat multiple inquiries that take place in a short time frame as one single inquiry; this has less of an effect on your score.
When you open more than one credit account in a short period of time, you are exposing yourself and your creditors to a higher amount of credit risk. In contrast to a rate-shopping scenario, applying for, and opening several credit accounts will lower your FICO score by a larger amount.
Credit Application Variables
For some people, one credit inquiry lowers their credit score by less than five points. Keep in mind that the range of FICO scores goes from a low of 300 up to 850. If your credit history is shorter, or if you have fewer credit accounts, credit inquiries have a greater effect on your credit score. Statistics indicate that consumers with six or more inquiries on their credit reports may be up to eight times as likely to declare bankruptcy than those with no inquiries, according to My FICO.
People who rate-shop before applying for a student, auto or home loan have their credit inquiries treated differently than those who are applying for credit cards. Their FICO scores will ignore the inquiries made in the 30 days before the report is scored. The person who finds and signs for a loan within that 30-day period won't see an impact on her credit score. Further, the FICO score looks for rate-shopping inquiries older than 30 days. Any of those that are found are treated as one inquiry.
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