Do you know what a credit inquiry is? Chances are, you do but you do not pay attention to it that much. That is because it is perceived to have a small effect on your score. While there is a lot of truth to that, you have to take some time to learn about it. We all know that when it comes to your finances, no small detail should be insignificant enough to keep you from educating yourself about it.
We all know how bad credit scores negatively impact your life. It can get you a high interest on your loan, or even get you disapproved of a much needed financial aid. It can even keep you from a good job or a great rental place in an affluent neighborhood. That is why we are highly encouraged to make sure that our credit reports display the best information about us.
To be able to monitor if your score is at its best form, you have to understand every little detail about it. You need to start by finding out what affects your credit score.
There are many credit score formulas that you lenders use but we will concentrate on the FICO score in this article. After all, the creator of the FICO score, the Fair Isaac Corporation started this credit measurement and all the other scores are patterned to it.
According to the information they provided at MyFICO.com there are 5 important factors that can affect your score. The most influential is the payment history (35%), followed by the amounts owed (30%), credit history (15%), credit type (10%) and new credit (10%).
Most people concentrate on the payment history and debt amount which is understandable. Not everyone will really take note of the other three. But since you have to keep your financial literacy high, you may want to learn what you can about the others. In this article, we will concentrate on credit inquiry.
What does it mean to have an inquiry in your credit report?
If you want to improve your credit score, the effect that a credit inquiry will have on it deserves some attention. Here are important details about this detail in your credit report.
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Your credit inquiry is linked to your new credit. That means it can affect 10% of your credit score. When someone looks at your credit information, that is considered an inquiry.
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Your credit report will show the company/organization who looked at your information for the past 2 years.
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Those who will inquire about your credit information includes banks, credit card companies, employers, government, insurance companies, lenders, landlords, utility companies, etc.
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For the FICO score, there are two classifications of a credit inquiry: hard inquiry and soft inquiry. Only the hard inquiries have an effect on your credit score.
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After 6 months, credit inquiries, even the hard inquiries will not have much effect on your credit score. After 1 year, they will have no effect at all – although they will stay on your report for 2 years.
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A credit inquiry will have more effect if the credit history is slim – even if it will only take 5 points from a credit score computation (at least this is for FICO scores).
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Only hard inquiries can be viewed on your report.
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According to MyFICO.com, mortgage, auto loans and similar loans will only be perceived as one inquiry in a credit score computation. At least, as long as it happens within a short period – typically within 30 days. This is because borrowers are encouraged to go “rate shopping” before finalizing a loan application.
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One credit card inquiry will have more effect on a score.
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Most of the time, these credit inquiries have minimal impact so wrong information are usually not reported. But if you want to be meticulous about your report, you can have some of these inquiries removed.
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You can only remove unauthorized hard inquiries.
Two types of credit inquiries
According to an article written and published on Fool.com, My FICO revealed that 28% of high achievers get a new credit application each year. That means a lot of those who wish to improve them financial position will opt to get credit to make it happen. This can be in the form of a mortgage for some real estate investment. Or it can be a business loan for a startup company. Or it can be a student loan to get a higher education so the borrower can increase their earning potential. Although it is not a necessity, most people take on credit for these reasons.
You have to remember that each application will result in an inquiry. After having said that only the hard inquiries get recognized in your credit score, you may want to know where a particular credit inquiry will fall under.
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Hard Inquiry. These include inquiries for mortgage, auto, student and personal loans. It also includes any inquiry made by credit card companies after your application. This inquiry will have a big effect depending on how many accounts you have opened recently and other hard inquiries within a short period. It will also have a big effect on those who only have a short credit history or few accounts open.
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Soft Inquiry. To put it bluntly, a soft inquiry is an inquiry that is not a hard inquiry. These are inquiries that are usually done without the consent of the consumer. Although it will not have an effect on your credit score, it will be shown on your credit report. Among the credit inquiries that are under this classification includes inquiries done by the government, potential employers, companies offering pre-approved credit cards, existing credit card company, insurance and utility companies.
How to deal with erroneous inquiries in your credit history
In case you find an inquiry that you want to remove, that is possible. As mentioned, some people will not even bother because this does not seem to have much effect on a person’s credit score. But in case you do want to have it removed, it can help in upping your credit score even if it is only a few points.
Here are the step by step process in removing any credit inquiry in your report.
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Note the unauthorized hard inquiries. You cannot remove the authorized inquiries.
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Look for the address of the companies who made the credit inquiry. It is usually under the Creditor Information in your credit report. If not, you may want to get in touch with the major credit bureau who released your credit report.
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Write a credit inquiry dispute letter. You can challenge any entry in your credit report and that includes unauthorized credit inquiries. You simply have to write a letter addressed to the company who made the inquiry on your report. You need to make one letter for each of the companies that you want to dispute.
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Send the letter with a return receipt request. You have to note that date and time you sent it and when it was received (based on the return receipt).
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Follow up on the letter. After 30 days, the inquiry should either be removed or the company will provide you with proof that they are authorized to get a credit inquiry.
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If the company ignores the letter, you have the option to dispute the case with the credit bureau or complain to the State Banking Commission.
When it comes down to it, there is no specific number as to how many credit inquiries you should have. Just make sure that if you will go through with having credit inquiry entries removed, you are also working on your late payments and debt amount. Even if you succeed in fixing this, and you do not work on the others, it will not help your credit score all that much.