Craig Watts, public affairs director at FICO, provided tips and facts on rate shopping and the scoring model.
- When looking for a mortgage, auto, or student loans, it may cause multiple lenders to request your credit report. The FICO scoring system understands that you are shopping for the best rate, not actually applying for multiple mortgages. To compensate for this, multiple inquiries in any 14-day period are counted as one inquiry.
- In the newest formula, inquires made in a 45-day period are counted as one inquiry. The 14-day period was expanded to 45 days in 2004 because there was such a variety of loan options available to people, Watts says. You can shop around for 45 days without your scores being affected. But please note that not all lenders are using the new 45-day model. “It takes time for all agencies to adjust to the revised formulas, but some never do,” Watts says. Do your homework first and shop within a focused period of time, such as 30 days recommends Watts.
- The FICO scores ignores inquires made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won’t affect your score while rate shopping says Watts.
- For those, such as my friend, who take a longer time shopping for a loan, the “hard” inquires were counted against her credit score. FICO usually subtracts no more than five points from a persons credit score.
- “The only time that inquires really have a significant impact on your score is when you’re new to credit, so there is not much credit history in your credit report for a scoring formula to evaluate,” Watts explains.
- “When you’re new to credit take it slow and don’t apply for more than one or two credit cards in a year,” advises Watts. Opening several credit accounts in a short period of time represents greater credit risk.
Since credit inquiries only account for 10% of your FICO score, Watts says it’s much more important that you pay your bills on time, keep balances low on credit cards and other revolving credit products, and apply for and open new accounts only as needed.
LaToya M. Smith is a staff writer at Black Enterprise.