Each time a company pulls your credit report for an application you've made, a record of the request is added to your credit report. Each of these requests, or credit inquiries, is part of your credit score, 10% to be exact.
When Can Businesses Request Your Credit
The Fair Credit Reporting Act (FCRA) requires businesses to have an acceptable reason for accessing your credit report. Acceptable reasons include:
- To grant credit. If you've applied for a credit card, loan, or other credit-based services, the business has permission to access your credit report to determine whether you qualify.
- To collect a debt. Debt collectors can use your credit report to obtain information, like your address or place of employment, that would help them collect a debt.
- To underwrite insurance. Some insurance providers use your credit score to gauge the likelihood that you will file a claim.
- For employment. Current and prospective employers may check your credit report before hiring you for certain positions, especially financial and upper-level management positions.
- To issue certain government licenses.
- For legitimate business transactions.
Companies that access your credit report under false pretenses or those who use it illegally are violating Federal law. You may be able to sue a company that violates your rights.
Two Types of Credit Inquiries
There are two basic types of credit inquiries and they're each treated differently when it comes to your credit score.
Inquiries that are made because of an application you've made are known as "hard" inquiries. These are the only credit inquiries that count toward your credit score. For example, an inquiry made when you apply for a credit card or loan will appear on your credit report and can affect your credit score.
In reviewing your credit report, you might notice that several inquiries appear from businesses to which you didn’t apply for credit. These are often from businesses who've checked your credit report because they want to offer goods and services to you. For example, creditors who send “pre-approved” credit card offers have often checked your credit report first to see if you meet the basic criteria for the credit card. These "soft" inquiries count toward your credit score.
Credit inquiries are also made by potential employers, businesses that you already have credit with, and yourself. These are also soft inquiries and won't hurt you.
The version of your credit report that you see includes all inquiries made into your credit report within the past 24 months; older inquiries drop off after 24 months. Only hard inquiries appear on the version of your credit report that lenders and creditors view.
How Inquiries Affect Your Score
Inquiries on your credit report are one of the ways credit scoring companies gauge the risk that you'll default on new credit obligations. Too many inquiries, especially in the past few months, might mean that you’re taking on too much debt or that you’re in some kind of financial trouble and are looking for credit to help you out. Several inquiries can lower your credit score.
Depending on how much information you have on your credit report, an additional inquiry might not affect your credit score at all. On the other hand, if you have a short credit history with only a few accounts, an additional inquiry could cause your score to drop by a few points.
Credit report inquiries will remain on your report for two years, but only those made within the last year are included in your credit score calculation. The most recent inquiries have the most effect on your score.
Inquiries And Rate Shopping
When you’re shopping around for a mortgage or auto loan, you want to get the best rate—and you should. You might worry that having your credit checked by several lenders could hurt your credit score.
The good news is that most credit score calculations treat all mortgage and auto inquiries as a single inquiry, as long as the inquiries are made within a certain period of time. For the latest version of the FICO score, this period is 45 days.