Your credit report contains detailed information on your financial past, including your bill payment history, current credit card balances and outstanding loans. A lending agency will pull your credit report whenever you apply for a credit card, automotive loan, mortgage or other type of credit. This practice is known as a "hard credit inquiry," and it shows up on your credit report. Companies run these checks to decide if you are a good candidate for credit, based on your past spending and repayment habits.
How Long Inquiries Stay on Your Credit Report
Credit inquiries remain on your credit report for two years, according to October 2010 information from Fair Isaac, also known as FICO, the Minnesota-based corporation that designed the credit scoring program that the consumer reporting bureaus use. The credit bureaus consider inquiries "negative items," meaning they act as adverse information on your credit report, similar to late payments or collection accounts.
Effect on FICO Score
Credit inquiries will lower your FICO score by a small amount. Specifically, an individual credit inquiry should lower your credit score by around five points, Fair Isaac reports in an October 2010 article. However, if you do not have much credit history or have many recent inquiries on your credit report, your score could fall by a much larger amount. Although inquiries remain on your credit report for two years, the FICO algorithm only considers inquiries from the preceding 12 months. This means that only credit inquiries from the past year will impact your credit score.
Rate Shopping
Although having multiple credit inquiries will typically damage your score, the FICO algorithm makes an exception for situations in which you apply to several lenders for the purposes of getting the best interest rates. This practice, known as "rate shopping," only counts as a single inquiry for FICO scoring purposes, provided that you apply for only one type of credit, for example, home loans, and you submit your applications within a 14-day period, according to Fair Isaac.
Considerations
Due to the small effect of inquiries on your FICO score, submitting credit applications is typically not terribly damaging to your financial profile. However, if you have a marginal credit score -- any rating between 620 and 675 -- it may be best to avoid inquiries, because a slight drop in your FICO value could move you into the "bad credit" category, preventing you from getting favorable rates and terms on credit cards, loans or mortgages.
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