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Inquiring minds

In the world of credit there are many different factors that build and tear down a score. One common conversation I often have in regards to credit is regarding inquiries. There are many misconceptions as to what an inquiry is and I will explain and debunk these misconceptions in this post.

Inquiries are entries that appear on your credit report when your credit information is accessed by a legally authorized person or organization (including yourself). Most commonly, inquiries are the result of an application for credit, goods or services, an account review made by a company that you already do business with, or a preapproved offer of credit that has been sent to you.

There are two types of credit inquiries: hard inquiries and soft inquiries. Account reviews and preapproved offers fall under the category of soft inquiries, which have no effect on your credit scores. Hard inquiries include applications for credit or certain services, and although their impact is minimal, they can temporarily affect your scores. It is good practice to get your credit report checked throughout the year to view hard and soft inquiries.

A hard inquiry appears on your credit report when a lender checks your credit in response to an application for a new loan, credit card or line of credit. Whenever you seek new credit, there’s the potential for a new debt, which may temporarily lower scores slightly until you can show that you are managing that new debt responsibly. Credit scoring models such as those from FICO or Vantage sometimes account for that increase in risk by lowering your scores slightly. Typically, most score models show hard inquiries typically lowering scores by less than five points.

Hard inquiries remain on your credit report for up to two years, but as long as you keep up with your payments, credit scores often rebound from an inquiry within a few months. And, most credit scoring models no longer count a hard inquiry in score calculations at all after 12 months.

Soft inquiries appear on your credit report when someone runs a credit check for reasons unrelated to lending you money. These events are not associated with greater repayment risk, so they have no effect on your credit scores. Common examples include but are not limited to: utility companies for services and equipment, auto insurance companies, credit card companies that you have accounts with currently, as well as a credit review with a lender in a bank or credit union.

It is ideal not to accumulate too many inquiries as they can lower your scores over time if one is rapidly shopping for credit. There are an exception to this however. If there are multiple inquires from a car dealership to other lenders when you finance a car (this is called shotgunning the credit as it goes to mulltiple lenders) within a certain period of time it is counted as one inquiry. Inversely, if there are multiple inquires foe different types of credit in a period of time that is a sign of concern to a lender. It is important to check your score reports at least once a year to ensure all inquires on your report were authorized as unfamiliar inquiry activity could be a sign of either an error or criminal activity. You can review your annual credit report for free Here.

Inquiries are as I call the “cost of admission to credit”. These inquires make up a small percentage of your credit score but it is important to not go overboard with shipping for credit and recognize that even if they are small, inquires can still have an effect on your credit score. Until the next time dear readers, excelsior.

Limited to limitless

In my realm of expertise, I have been exposed to credit ranges across the spectrum. Some are great, some are good, some are ok and some need work and that’s alright with me. Credit is something that some treat like a sprint, but it truly is more of a marathon. Some treat some items on their credit (collections, current payment history, credit card limits, etc.) as an individual guitar solo rather than looking at all the items on their credit report as a symphony. One common thing I come across is a combination of income and credit. You could make excellent money, but your credit could be excellent, fair, poor, or nonexistent. I have also seen the inverse with those that make less money as well in addition to those in the middle of the income ranges, I have seen. A concept that eludes some of us is the concept of having limited credit.

The terms “limited credit” and “no credit” are typically used synonymously to describe anyone who has not been the primary account holder on a credit card or loan for three years. This is something commonly seen with those that have bought everything with cash only or just never had a need to get anything on credit. Additionally, some lenders might not even report to the credit bureau which is what sometimes is referred to as “invisible credit”. If you suspect your credit history is insufficient because of a data problem, contact your lenders and check whether your personal information on file with them is correct (i.e. name, date of birth, social security number, etc.).

Lending companies/financial institutions give inexperienced consumers the benefit of the doubt to a certain extent in that the terms they offer them are better than those given to people with bad credit. However, you must demonstrate the ability to consistently make on-time payments to your monthly financial obligations as well as maintain balances below your credit limits in order to build the requisite credit history to be trusted with higher credit lines as well as competitive rates and rewards.  An example of this would be if someone with limited credit requests a loan for a new auto. With zero history (keeping in mind your credit report is like your report card for your credit) it isn’t normal to see high balance loans for an auto with such limited history (unless there is a very good strong cosigner or a significant down payment). Without a down payment or cosigner, there’s a good chance that you could end up with a smaller car loan to start out (even if you make excellent money) due to the lack of history to prove creditworthiness based on the risk to the lender or receive a denial for credit. Once the loan has been successfully paid off (and provided a great pay history) that loan could be used as the basis for another perhaps larger loan in the future.

No matter what age you are or where you are in your credit-building journey, a lender typically relies on a credit score to help decide whether to approve you for a credit card or loan. There are numerous ways today to build your credit. From online banks to even your own bank or credit union there are programs designed to start off your credit journey before your next big purchase. From share-secured loans to secured credit cards, there are ample opportunities to build credit in today’s times. Consult your local bank/credit union for different credit building products to help you in your financial journey. Until the next time dear readers. Excelsior!