When you think of getting your credit pulled, you think your score is going to drop a lot of points right? Well, you are incorrect. There are rules in place from the FICO algorithm that keep your scores from taking huge dives. There are also rules in place in which your score will decrease, but only if are unaware of them, will your score be affected negatively. Many of my clients are surprised when I go over how they can keep their scores from dropping by getting their credit pulled a certain way. Let’s get started!
1. Inquiries – Hard & Soft
First, let’s explain what a Hard Inquiry or Hard Pull is. A Hard Inquiry is when you give authorization for a financial institution to get an updated credit report on you. Its called a Hard Inquiry because too many of these inquiries, normally 5-8, in a 2 year period will have a negative impact on your credit report. How many points can a hard inquiry impact your score? Its impossible to tell as everyone has a different credit report. Not to worry though, as Inquiries only stay on your credit report for two years. Also, inquiries are less than 5% of what makes a credit score, so the impact is normally low.
A Soft Inquiry is the complete opposite of a Hard Inquiry. A soft inquiry is also known as a promotional inquiry sometimes as well. A soft inquiry is when a company gets an updated credit report without your written or verbal permission. Since they don’t ask for your permission, they can only see a condensed version of your score. A great example of this is when you receive a credit card offer in the mail. They often call these “Pre-Screen” offers. They simply look at the score or very basic information on your credit report. Also, if you yourself get an updated credit report, that is a soft pull as well. Obtaining your credit report does not affect your credit.
2. What Is The “Rate Shopping” Rule?
This rule is becoming very popular as consumers are starting to research more about their credit reports. In short, “Rate Shopping” is when a consumer is looking for approval on an Auto Loan, Mortgage Loan, Or Student Loan. FICO Scores ignore mortgage, auto, and student loan inquiries made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won’t affect your scores while you’re rate shopping. In addition, FICO Scores look on your credit report for mortgage, auto, and student loan inquiries older than 30 days. If your FICO Scores find some, your scores will consider inquiries that fall in a typical shopping period as just one inquiry. For FICO Scores calculated from older versions of the scoring formula, this shopping period is any 14 day span. For FICO Scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span. Each lender chooses which version of the FICO scoring formula it wants the credit reporting agency to use to calculate your FICO Scores. This is very helpful as sometimes, a consumer may not get approved for the first bank and this allows them to try elsewhere with that 30 day period.
3. Do Your Research & Ask Questions
Before anyone pulls your credit, it never hurts to call them beforehand or look online for what rates are offered. So many times, I see consumers applying for credit in which the financial product they are seeking approval has standards that they don’t meet. You must know what scores are accepted and declined before adding a hard inquiry. Granted, you have the “Rate Shopping” rule, but why apply at a place that has requirements you don’t meet? To find out what your FICO score is, you can purchase your score as low as $19.95 at www.myfico.com. Keep in mind, FICO has multiple scores within a Credit Bureau. Once you purchase your score, you will see your Auto Score, Mortgage Score, and etc. You can also get your free credit score with Credit Karma, but less than 10% of lenders use this algorithm. It’s a great place to start and you can at least have a bracket as this score is not too far from the FICO score.
The Bottom Line
After reading this article, you should know how your score is impacted when your credit is pulled and understand hard and soft inquiries. Knowing this information should create more comfort as you are on your credit journey. Be sure to share this article with someone that you know who can benefit from it.