How Credit Report Inquires Affect Your Credit Rating

If you are like the vast majority of consumers, you understand how credit works, to a very limited extent. In other words, you have a line of credit somewhere, and as long as you do not exceed your credit limit and pay at least the minimum amount on time every month, everybody is happy. But there are some additional things about credit reports that you should know.

First of all, there are three major credit bureaus in the US – Experian, Equifax, and TransUnion. Each of them maintain a credit report on you, including all past and present credit accounts and your credit history. But they do not share information between them, so each credit bureau has a credit score for you that is different. That is because not all creditors report to all three bureaus; in fact, very few of them report to all three.

Beyond that, how do inquiries into your credit report affect your credit score, or does it have any effect at all? The answer is that it definitely has an effect, but the type of inquiry determines the level of effect. For example, if you yourself apply for a new line of credit somewhere like for a new car or at a department store, this has the largest effect on your credit score. If you are approved, then your credit score reflects the fact that you now have this new line of credit which has been approved and the very real potential to extend yourself too thinly.

Sometimes a credit card company has a new product or service that they want to alert people to, but just people who meet their criteria, which is aimed at the type of person that they have deemed most likely to be receptive to their new offering. This type of inquiry into your credit report is known as a soft inquiry, done without your permission or knowledge, just to see if you meet their criteria for sending their ad, and this type of soft inquiry has little to no effect on your credit score.

One of the other factors that can adversely affect your credit score is the number of "pulls" or inquiries on your credit report. Yes, even time an inquiry is made to your credit report, that fact is recorded and becomes a part of your credit report with that credit bureau, also indicating whether it was a "hard pull" or a "soft pull". A large number of hard pulls on your credit report will definitely affect it negatively, especially if those pulls do not result in a similar number of newly approved lines of credit.

The time factor is also taken into account. For example, having 25 hard pulls on your credit report over a three year period of time is not necessarily bad, but having those same 25 pulls on your credit report over the course of two months is definitely going to set off a red flag with the credit bureau and negatively impact your credit score.

The bottom line is to not apply for credit ad hoc and at every opportunity. While it may result in a new line of credit, it may also lower your credit score to the point where those new accounts are actually COSTING your more via a lower credit score than they are really worth to you.