Did you know that when you apply for new credit, your credit score may be affected? We aren’t saying that it’s always affected, but there is a good chance. Even if the inquiry doesn’t affect your credit score, in particular, it does show up on your credit report in the inquiry section. This gives future lenders a ‘head’s up’ that you applied for new debt. Because trade lines can take a while to show up on your credit report, it’s a way to let lenders know that you may have more debt than your current credit report shows.
On average, you can expect hard inquiries to stay on your credit report for two years. But, it only affects your credit score for the first 12 months. After that, it simply shows up in the inquiry section, letting lenders know you were shopping for other credit during that time. It rarely has much of an effect though.
What do Hard Inquiries do to Your Credit?
Hard inquiries may not hurt your credit as much as you think. Typically, you lose about 5 points for every inquiry, but there are exceptions to that rule which we discuss below.
Before you think 5 points will ruin your credit though, you have to look at the big picture. If you have longstanding credit with a lot of history and a relatively high score, 5 points won’t do much to harm your credit score.
If, on the other hand, you are just establishing your credit, 5 points could mean a lot. When you are just starting out, every point will help. It takes time to establish your credit because it’s comprised of the following factors:
- Age of your accounts
- Amount of credit outstanding
- Number of accounts you have (as well as their type)
- Payment history
The age of your accounts makes up about 15% of your credit score. If you are just starting out, your credit score can take a while to get off the ground since your credit is so new. As your accounts get older, the score can increase. But if you open new credit in the meantime, it will lower the average age of your accounts again, making it hard for the credit score to increase.
If this is your situation, you want to steer clear of credit inquiries. The points you lose for each inquiry could make your credit score low enough that lenders won’t offer you a loan.
Dealing With Multiple Inquiries
There is one exception to the inquiry rule. If you have multiple inquiries for the same type of loan, you may not get hit with inquiries. For example, if you are shopping for a mortgage, you may get quotes from three or four lenders. Normally that would cost you 15 to 20 points on your credit report, which could be quite damaging. But, because the credit bureaus realize that you are shopping around, as long as you get quotes within a few week timespan, they will only hit your credit for one inquiry.
Keeping Your Score High
If you do need to apply for new credit, it helps to keep your other factors in good status so that you can apply for new credit and not have the inquiry affect your credit score too much.
For starters, this means you should keep the amount of your outstanding credit to a minimum. If you have more than 30% of your available credit outstanding, it will affect your credit score in a negative manner. If you do charge something, try to pay the bill in full so that you don’t have to worry about your credit utilization rate.
Other factors include the number and types of accounts you have. It’s best to have a good mix of revolving and installment debt. If you have too much revolving debt, you pose a high risk. If you have all installment debt, you don’t show lenders that you can handle your credit lines responsibly.
Finally, and most important, is your payment history. Any bills you have make sure you pay them on time. If you have to pay your bills late, at the very least, make sure they are not more than 30 days late. Once your bill hits 30 days past the due date, the creditor can report it late to the credit bureaus. This can affect your credit score much worse than any inquiries on it.
Credit inquiries aren’t something to take lightly. Before you apply for new credit, make sure you actually need it. Don’t apply for excessive accounts and if you do shop around for the best rates, make sure you do so within a short time period so that you only get hit for one inquiry.