So has the lending world scared you into believing your credit score is your whole meaning in life? Obviously it isn’t, but it does play a very important role in key areas of life. Some you may surprise you. Credit scores could determine insurance rates, employment, opening a bank account, and of course, borrowing money. Scores are especially important in mortgage lending. There are several factors which make up a credit score. One of these factors are credit inquiries.
A credit inquiry means a company or person is “pulling” your credit report. Although there are more important factors, credit inquiries generally contribute to 10% of the overall score. Therefore, credit inquiries do matter. This includes someone looking to get an 800 credit score. Furthermore it could include someone that needs just a few points for loan approval.
Russell Smith, Ops Manager Southern Region for OVM Financial has a quote that says it all. “Everyone has a number, so you might as well have a good one!”. So let’s discuss types of inquiries and how they affect mortgage approvals or life.
Types of Credit Inquiries
Credit inquiries are basically broken down into 2 main groups. “Hard inquiries” may affect a credit score. Conversely “soft inquiries” do not affect a score. So it is important to know who is pulling what. There are 4 types of hard and soft inquiries.
- Account review inquiries – soft
- Promotional inquiries – soft
- standard inquiries – hard
- self-pull inquiries – soft
Even though hard inquiries are the only ones affecting a credit score, it is important to understand each.
Account Review Inquiries
Insurance companies and employers often pull these credit inquiries. This report only displays negative information. These include late payments, judgments, bankruptcies, or foreclosures. Companies look at this report to determine your financial strength and your risk. Statistics show that more credit issues, means higher risk in other areas. Employers in the financial sector or a high security clearance area take this report very seriously. But in most areas it is not a primary reason to insure or hire. Although, it does play a role.
Affect on your mortgage approval. These type of credit inquiries will not affect your credit score or your mortgage approval. So, it is a soft pull. Often during the mortgage process, you will hear us say “do not apply for more credit prior to closing”. But a homeowner’s insurance inquiry is often necessary and it is definitely ok for your mortgage approval. Do NOT change jobs during the mortgage process though! Believe it or not buyers do this more than you would think.
This type of inquiry is purely for knowing someone’s credit score. As it will not display any details or makeup of the credit score. Credit card companies, banks, furniture companies, or anyone else looking for a certain type of client uses these. Rather than shotgun a marketing campaign to everyone, companies are able to find their target market. Some may want 800 scores where others may focus on the 580 range.
Affect on your mortgage approval. The public has no control over these inquiries so it obviously does not affect a credit score. These inquiries will not even show up on a credit report. By the way, have you ever wondered why you get so many phone calls or mailings after applying for credit? The credit bureaus sell your information to companies. This is called “trigger leads”. If you apply for a car loan, this activity is sold to lenders and you will receive marketing. Since you have applied for credit, you are considered a hot lead!
This credit inquiry is self explanatory. It is the individual pulling his or her own credit reports. There are many services that offer one or more of the credit reports for free, but there are some tricks. Watch out for the ones that make you pay for a service to get a credit report. It is very important to check your credit each year so check out this article which explains how and why.
Affect on your mortgage approval. Since this is not a 3rd party pull, it does not affect your mortgage approval at all.
These credit inquiries are a hard credit pull, so it affects your credit score. But as long as you understand this area, it will have a minimal to no affect on your credit life. Basically use them in moderation. Obviously to open a credit account with a lender, someone has to pull your credit. Therefore it is important to do your homework and determine if the inquiry is credit worthy. Because standard inquiries will affect a credit score, be wary of applying or opening accounts often. MyFICO.com states “Large numbers of inquiries also means greater risk. Statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries.”
Especially watch out for this statement during the holidays! “If you open a charge card with us, you will save 30% off of your purchase today”. Sound familiar? Check out our article which explains what this may do to your credit scores.
Multiple credit inquiries will not always affect your scores negatively though. Certain credit inquiries are looked at as one. Examples include shopping for a mortgage, auto, or student loan over a short period. There are many scoring models so the “shopping” range varies from 14 – maybe 45 days. Keep in mind that credit card or finance company inquiries are considered multiple inquiries. So they could hurt scores.
Affect on your mortgage approval. Standard credit inquiries could play a huge role in a mortgage loan approval. First of all, once you have applied for a mortgage loan, stop applying for new debt! As mentioned, the credit score impact is not as bad as late payments or high balances on cards. But new credit inquiries could cause the following:
- Lower credit score
- Determine if a new account was opened
- Prove terms of new loan or card
- Higher debt to income ratios which could affect loan approval
- Worse rates because of a lower score or higher debt ratio
Remember that even though credit inquiries account for about 10% of a score, it could play a major role in scores and approvals. Hopefully you found this helpful. Check out our other credit related articles
- One score does not always mean limited credit
- What to do with those old credit cards that could help your credit scores
- Credit mistakes to avoid prior to closing
Author: Russell Smith
Team Move OVM Financial loan officer success is Russell’s primary focus. He provides the tools and techniques he used as a top producing loan officer. Additionally he offers the Team Move OVM Financial Agent Training Program. Sharing is so important to Russell so he works diligently to be a resource to loan originators and Realtors.