When you apply for a loan, lenders are going to check your credit score, and if you are applying to multiple lenders, that means multiple credit checks. Many people may be unaware that this can actually take a toll on your credit in certain cases. The Star-Ledger reports that multiple inquiries for a specific type of loan, such as a mortgage or an auto loan, have far less of an impact on your score than credit inquiries for different kinds of loans in a short period of time.
“You have to remember what a credit score is supposed to do,” Howard Hook, a certified financial planner and public accountant, told the news source. “It is supposed to measure the probability that a borrower will be able to repay a loan. Research done by FICO has shown that people with numerous credit inquiries are a greater risk than people with a lower amount of inquiries.”
Public affairs manager Craig Watts of Fair Isaac Corp, the company that created the FICO credit-scoring model used by most lenders, told The Washington Post that multiple checks only play a small role in credit scores. The news source reports that multiple inquiries for mortgages and car loans within a two-week period are counted as one. The newest FICO formula more than triples this grace period to 45 days, allowing consumers more time to find a suitable loan. However, many lenders can take months to adjust to new formulas and some never do, so consumers should be careful when applying for loans.
The news source also reports that when you apply for an auto loan or mortgage, all inquiries made within 30 days of finding a loan will be discounted. Other times that credit scores are unaffected include lenders seeking information regarded a preexisting account, employer inquiries and score requests for lenders who are sending out ‘pre-approved’ credit offers. Your credit score is also left alone when you request to see your own credit score, which you can obtain for free, once a year from each of the major credit bureaus at AnnualCreditReport.com.
The best way to improve bad credit is to make timely payments on all of your loans and credit cards, and to avoid using credit cards extensively.