What You Need to Know About Credit Inquiries
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.
- 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.
- Underwrite insurance. Some insurance providers use your credit score to gauge the likelihood that you will file a claim.
- Employment. Current and prospective employers may check your credit report before hiring you for certain positions, especially financial and upper-level management positions.
- Some government agencies may check your credit report before issuing certain licenses.
- Legitimate business transactions.
Companies that access your credit report under pretenses or those who use it illegally are in violation of Federal law. You may be able to sue a company that violates your rights.
Two Types of Credit Inquiries
Some of the inquiries on your credit report aren't included in your credit score. Inquiries that are made because of an application you made for credit are the ones that affect your score. These voluntary, or "hard," inquiries are the only credit inquiries that count toward your credit score.
When you review your credit report, you might notice that several inquiries appear from businesses to which you didn’t apply for credit. Other businesses might check 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.
Credit inquiries are also made by potential employers, businesses that you already have credit with, and yourself. None of these "soft" inquiries count toward your credit score.
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. When lenders and creditors look at your credit report, only the hard inquiries appear.
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 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 reduce 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.