My husband and I recently bought our first home. Lured by a gorgeous yard and updated kitchen, we chose a lovely two-story colonial in Northern New Jersey, and handed over a sizeable chunk of our life savings.
Of course, like most about-to-be suburbanites, we had to find a mortgage. And though our credit was solid, our realtor had one piece of advice, which turned out to be invaluable:
Be careful of too many credit inquiries.
A credit inquiry happens when anyone – a bank representative, a landlord, a lender – pulls up your credit report to take a look. There are two kinds: soft and hard.
- Soft inquiries come from people like landlords and employers, who want to check your credit history, but aren’t necessarily going to loan you cash.
- Hard inquiries come from places like credit card companies and mortgage lenders – institutions about to loan you money, that want to make sure you’re not a financial risk.
“A hard inquiry would be one that shows up on your credit report,” says Barbara Buonfiglio, Northeast Retail Credit Manager at Wells Fargo Bank. It’s physically noted on the document and, “any creditor that pulls your report would see it. A soft inquiry doesn’t show up.”
As it turned out, a handful of extra hard inquiries could have dropped our FICO score – essentially, our credit rating – by a few points. And when it comes to mortgages, those points can work out to thousands of dollars extra paid over the lifetime of a loan.
We had no idea.
Credit inquiries and your FICO score
Whenever you search for home, auto, or other substantial loans, lots of numbers tend to fly around. But there’s one that matters above all: your FICO score. That figure determines everything from your interest rates to your loan eligibility. It’s based on a combination of interconnected elements, the most important of which are your payment history and outstanding debt.
However, another big factor is new credit, which accounts for about 10 percent of your total score. This is where inquiries happen. Every time you open a new line of credit, a hard inquiry is made into your credit report. “If you have multiple [hard] inquiries,” says Buonfiglio, “it would certainly bring your score down.”
In addition to dropping your FICO a few points, it also signals to potential lenders that you’ve been credit shopping – that you need lots of money, fast, which could imply that you’re in financial trouble. According to Barry Paperno at Yahoo! Finance, “People who have added six or more inquiries during the past year can be up to eight times more likely to file for bankruptcy than those with credit reports showing no inquiries.”
To put it simply, lenders don’t like that.
According to the official myFICO website, only inquiries made within the last 12 months count towards your score, with some exceptions for mortgage shopping. That means one or two hard inquiries won’t hurt you, especially if they’re spread out over time. But it also means you shouldn’t open multiple lines of credit before applying for a big loan – particularly a mortgage, like my husband and I were. This includes store-specific credit cards, like Macy’s or Old Navy, that offer discounts when you sign up.
To better understand inquiries, Buonfiglio suggests checking your credit report. “Get a copy of your credit report annually and verify your information is correct,” she says. “Any loan amounts, any credit cards, credit history – any inquiries.” Making it a yearly practice will improve your grasp of your overall credit situation, as well.
As for my family, we avoided the inquiry pitfall, maintained our good FICO scores, and nabbed a great interest rate on our mortgage. The money is nice, but the peace of mind is priceless.