Can ‘Hard’ Pulls Really Ruin your Credit Score?
By Marcia Frellick
April 27, 2012
When you apply for a credit card, mortgage or retail card, or try to rent an apartment or get a phone contract, someone is going to check up on your credit.
Those checks by third parties are called “hard” pulls or inquiries, and they can hurt your credit score. But how much damage can they do? Individually, not much, says credit scoring company FICO. In a recent blog, FICO explained that inquiries aren’t a major threat to credit scores.
So do inquiries really matter? They could. If you already have black marks on your credit report, multiple inquiries can add up and put you below the minimum score you need to be approved for a loan at the best possible interest rate.
A minor threat?
Inquiries fall into the “new credit” category of your score, according to FICO — and that category counts for only 10 percent of the equation. Other categories like payment history (35 percent of your score) and amounts you owe (30 percent) are much more important.
When an inquiry does affect your credit score, according to FICO, it will typically knock your score down by only five points. FICO reported that, 89 percent of the time, inquiries are not even one of the top four greatest factors affecting your score. It cited these statistics:
- 49 percent of consumers have no inquiries, 24 percent have one inquiry, and 27 percent have two or more.
- Inquiries are not a factor for at least 57 percent of consumers.
- Only 0.4 percent of the time are inquiries the score factor with the greatest impact.
- Only 14 percent of consumers lose more than 10 points because of inquiries. Only 4 percent of consumers lose more than 20.
When inquiries matter
Consumers, especially those making a major purchase in the near future, should be aware of what counts as an inquiry and how it can affect a credit score. If you have a short credit history or few accounts, for example, the inquiries’ impact may be greater.
The first distinction to make is whether the inquiry is “soft” or “hard.” Hard pulls will chip away at your score. Soft pulls don’t affect it. In fact, you may not even be aware that one has been made.
Soft pulls include instances when mortgage lenders look at your credit to pre-approve you for a loan, when credit card issuers check your credit to pre-approve you (and send you offers in the mail), when potential employers consider your credentials and when insurance companies evaluate your risk. When you check your own credit, that’s also a soft pull.
Hard pulls happen when you actually apply for a particular mortgage or line of credit. Sometimes, credit checks that result from you taking on long-term financial obligations (renting an apartment, for example, or getting a mobile phone contract) register as hard pulls. Each inquiry lowers your credit score by about five points for a year.
“They are reported by the credit reporting agencies for two years, but they are factored and impact your FICO score for just one year,” says Anthony Sprauve, director of public relations for FICO.
You can see both hard and soft inquiries when you view your credit report, but creditors can see only hard inquiries.
Exceptions to the rule
If you’re shopping around for mortgages and car loans, you might apply to several lenders to see which offers you the best rate. FICO has calibrated its algorithms so that rate shoppers don’t get hit for each inquiry.
“The algorithm behind the score is savvy enough to know when someone is shopping,” Sprauve says.
If you have several inquiries for the same type of loan within a relatively short amount of time — 30 to 40 days — you won’t be penalized. In these cases, several inquiries would be counted as one.
Penalties come when someone is trying to open several types of credit in a short period of time — a car loan, credit card and a mortgage, for example. Applying for multiple types of credit at once makes it appear that you’re looking for money and can’t get it in other ways, says Doug deBruyn, certified mortgage adviser with the Mortgage Advisory Group in Bellevue, Wash.
Several attempts to access credit add to your risk of not repaying a loan when creditors consider lending you money. FICO data show that people with six or more inquiries on their credit reports can be up to eight times more likely to declare bankruptcy than those with no inquiries.
Minimizing the impact
If your FICO score is hovering near 700, hard pulls could pull you below that benchmark and make a significant difference, deBruyn says (as much as a quarter percent or half percent on a mortgage interest rate), which can result in a higher payment every month.
A score just below 700 “makes a huge difference now,” deBruyn says. “A few years ago it didn’t make that much difference, but now it really does. It could be a difference of half a percent compared to a score of 740.”
It’s hard to pinpoint what part of a credit score may push you into paying a higher rate, but there are some ways to minimize hard pulls:
Think carefully about whether you need that retail card. Offers of discounts when you open a store credit card may seem attractive, but if you don’t pay off the balance in full, the interest charges likely will wipe out the original discount in the first month, Sprauve says.
Moreover, if you’re making a major purchase, like a home, that card will just become one more inquiry you’ll have to explain to a lender.
“In the mortgage world, we’re going to go back 120 days to see who’s pulled your credit,” deBruyn says. “And we’re going to require a letter of explanation from the borrower on each pull to explain what they were for and whether they have resulted in any new debt that’s not on their credit report and if so, what is their payment.”
There are times when opening a line of credit near the time you’re buying a house may be the right decision. For example, Sprauve, who is selling his house and buying a new one, says that it made sense to open up credit at Home Depot, given the work to be done on improvements. Yet consumers should ask themselves whether they really need the new credit. Often the answer is “no.”
“It’s important when thinking about a major purchase … to not be opening new credit within, at a minimum, six months, better case a year, before you’re actually applying,” Sprauve says.
Pull your own credit report free through Annualcreditreport.com. You can offer the report to potential landlords so they don’t have to pull it themselves. Mortgage companies and other lenders, however, will likely insist on making the inquiry when it comes time to make a lending decision.
Confine your shopping for a car loan or mortgage to 30 to 40 days. That will ensure any inquiries fall under the “shopping” exemption.
Keep other factors in your credit score clean. Pay your bills on time and keep your credit card balances low — about 10 to 15 percent of your total available credit. That will help mitigate the effect of hard pulls.
If you find inquiries on your credit report that you think are being improperly reported, notify the big three credit bureaus, Equifax, Experian and TransUnion. The Federal Trade Commission offers a guide to disputing inaccurate credit information.