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How Credit Inquiries Affect Your Credit Score

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When seeking a loan, one of the most important factors taken into consideration is your credit score. Many things can affect your credit score, including your credit history, the amount you owe, and your mix of credit.

Credit inquiries are a point of confusion for many borrowers. There are both hard and soft credit inquiries. Credit inquiries have the potential to affect credit score, so it is wise for borrowers to understand the differences between the two types of inquiries. Credit scores are a key part in how lenders determine credit worthiness and the cost of a loan for the borrower. 

If you’ve ever questioned opening a new credit card account because of the inquiry to your credit, or wondered how your credit score would affect your home mortgage loan, Guardian Mortgage is here to shed some light on a topic many perceive as murky at best.

Credit Score 101

Before diving into the role of credit inquiries, it’s good to have a basic understanding of your credit score(Opens in a new window) and how it works.

There are several different credit scores(Opens in a new window) available to consumers and lenders. Each type or brand of credit score uses its own calculations. Your score may vary based on the brand. At Guardian Mortgage, we use the middle score of the three top brands.  

One of the oldest and most commonly-used credit score brands is FICO. According to FICO(Opens in a new window), “A FICO Score is a three-digit number based on the information in your credit reports. It helps lenders determine how likely you are to repay a loan. This, in turn, affects how much you can borrow, how many months you have to repay the loan, and how much it will cost (the interest rate).”

What does this mean for you? In essence, your chance of getting a loan that fits your needs is reliant on your credit score – a higher score shows that you handle credit well, which can improve the terms of your loan. Scores typically range between 300 and 850.

So, what’s an “excellent” credit score versus a “poor” credit score? Here’s how credit scores generally break down:

  • 800 or higher = Superior
  • 740-799 = Very good
  • 680-739 = Good
  • 580-669 = Fair
  • 579 and below = Poor
 

As mentioned above, the following factors influence your score:

  • Your payment history - Have you paid your bills on time?
  • How much of your credit you’re using - Less is better when it comes to spending up to your credit limit.
  • Age of credit - How long have you held the credit?
  • How many types of credit you have - Credit card, auto, home and school loans, etc. all count as different types of credit.
  • Recent credit applications - These are also called “hard inquiries,” and come from applying for loans or credit cards.

The better your credit, the better you rate. If you have a higher credit score, lenders see that as a sign you are more likely to pay back your loan. A lower credit score makes a loan riskier for the lender.

What Are Credit Inquiries and How Do Credit Inquiries Affect You?

According to Experian.com(Opens in a new window), a “hard” inquiry is when a lender checks your credit as a result of your application for a new loan, credit card, or line of credit. When this happens, your credit score temporarily decreases. For FICO scores, this decrease is typically less than five points, and can disappear within months if you make your debt payments in a timely fashion.

“Soft” inquiries are not related to lending you money. They may appear on your credit report, but they do not alter your score. For example, when you check your own credit or an employer checks your credit as part of the hiring process, these are considered soft inquiries.

Your credit score is of the utmost importance when making big purchases that require a loan. A better score can save you big money long term.

To prevent a slew of hard inquiries from negatively impacting your credit score, avoid applying for multiple credit cards or loans at one time. This could lower your score significantly, therefore decreasing your chances for more favorable terms. Instead, think ahead to big financial loans you have coming up, like a home mortgage or an auto loan. Then, ensure you haven't applied for other new lines of credit within a few months of your loan application.

What To Remember When Considering a Mortgage

Generally, mortgage lenders require a credit score of at least 620 to receive a conventional mortgage loan(Opens in a new window). Conventional loans are not backed by a government agency, so qualifications are often tougher. However, they offer good rates, down payment options and flexible terms, which makes them an attractive option.

On the other end of the credit score spectrum, if you have a credit score of 740 or higher, you’ll often gain more favorable terms and may need a lower down payment.

To put it into perspective, a difference of 100 points on a credit score could impact your rate by 0.5%. This difference could cost you $10,000 or more over the lifespan of the mortgage!

The key takeaway to remember ... don’t double-dip on your credit inquiries. If you plan to apply for a loan, do not apply for a credit card at the same time. You could save yourself thousands of dollars. For more information on home mortgage loans, contact your Guardian Mortgage loan professional(Opens in a new window). We’re here to help you navigate the home mortgage lending process.


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