There are several reasons you apply for credit: 1) to take advantage of a special offer for a credit card; 2) to purchase a home, auto, boat, etc and 3) because you need additional credit to pay your bills. Most people with good credit don’t have to apply for a credit card because they receive so many pre-approved card offers in the mail.
Regardless of the reason, each time you apply for credit it’s highly likely that the lender is going to pull one or all of your credit reports. And, it’s likely they’ll pull your FICO credit score or your VantageScore credit score. When the lender pulls your credit report it leaves behind a bread crumb called a credit “inquiry.” Inquiries can (not “will”) lower your scores.
Comprises 10 percent of your FICO score and is “less influential” in your VantageScore score
Scoring systems consider inquiries because they are, in fact, predictive of elevated credit risk. However, they’re hardly on the radar compared to other more important score influencing factors, like late payments and maxed out credit cards. Inquiries account for 10 percent of the points in your FICO credit score and VantageScore calls inquiries “less influential.”
Inquiries can remain on your credit report for 24 months, but after 12 months they are no longer considered.
If you are approved for credit, a new account will be reported on your credit report. A new account can decrease your credit score. It takes time to build history and for it to have a positive impact on your credit. If you have other accounts on your credit report that are many years old, the addition of a newly opened account can have less of an impact.
Inquiries for credit have a small impact on your score, but even a few points may be all you need to qualify for a lower interest rate. This can equate to a large savings in what you pay in interest for a mortgage, car loan or credit card. If you plan to apply for a mortgage or car loan, you should not apply for any new credit until your loan have been approved and closed. As a rule of thumb, you shouldn’t apply for credit unless you really need it.
Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, founder of www.creditexpertwitness.com and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. You can follow John on Twitter here.