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1/25/2007

Intro to Credit Gaming - Part V

See previous parts I, II, III, IV.

We finally get to the last component of your credit score, "recent credit requests and recently obtained credit", which comprises 10% of your credit score. This is the one that many people seem to freak out about. "I don't want to apply for X, because I don't want the inquiry on my credit report!" is the common refrain heard on forums and weblogs everywhere. The thing to realize is that 1) you have to have quite a few inquiries in a short amount of time for this to have any impact; and 2) even so, the impact will be quite minor, as well as short-lived.

First off, let's examine the reasoning behind this component of your credit score. The first part is "recent credit requests." Say that you have applied for 7 credit cards in the past 3 days. That will be enough to cause any lender to worry. First off is, even if your credit is otherwise good, why would you be applying for so much credit in such a short time period? Maybe your finances are in disarray, or maybe you've gone crazy. In any case, it's a red flag. If you're denied this new credit, that's a knock against you. Moving along to the "recently obtained credit" part, if you're approved, that's also a problem because now you have a new line of credit which you have not proven yourself able to use responsibly.

So that's the negative part. The positive part is that any normal behavior will hardly ever be punished, and any punishment will be very limited. The max that your score can be decreased for this purpose is 50 points. That can be enough to make a difference in interest rates for a mortgage, but it's not enough to make "good" credit look "bad." According to the MyFICO site, inquiries can affect your score for up to 12 months, but they seem to stay on your report for longer (I've got some that are 23 months old on my credit report).

Another positive thing is that, assuming your application is approved, chances are that your credit score will go up overall instead of down. This is especially true with credit cards or other revolving lines of credit. Adding a new line of credit will increase your overall credit limit, which will decrease your debt to limit ratio, the second most important part of your score. I guess that obtaining a new installment loan (such as a mortgage or auto loan) will probably decrease your score overall; you'll have first the inquiry, and then a bunch of new debt added to your report. However, I'm not sure how much of an impact this would actually have on your FICO score. I'm lacking data here.

Basically, my point here is that you really shouldn't worry about this aspect of your credit score too much. If you know that you are going to be applying for a mortgage very soon, you should probably not apply for any other credit if you can help it. Checking your credit score and talking to your lender will help you find out if you might be close to the line between two interest rates or loan package programs. If so, a couple of points could make the difference, and these particular couple of points are easily managed. Otherwise, though, don't worry about it. The natural variation in your credit score (due to timing issues when lenders report to the credit agency, etc.) will probably be quite a bit larger than the tiny amounts you might get docked for recent inquiries.

1 comment:

sm said...

Thanks for this post. I was always wondering about this. Do you know a general rule of thumb for how long one should wait between applying for credit cards? How my credit applications is OK per year? Also, does pulling your own FICO score show up as a credit inquiry?