A frequent question I see from readers is about the impact of credit inquiries on your credit score. How much do inquiries matter? I just applied for a credit card, how long do I have to wait before I can I apply for another one? I will be buying a new house soon, should I open a new credit card?
We’ve talked about credit scores before, but let’s dig deeper into the credit inquiries.
Why You Shouldn’t Be Scared of Inquiries
Inquiries on your credit report are a tool. They’re an indicator. They aren’t evil, and you should use them to your advantage, not be scared of inquiries and avoid them at all costs.
I’m an extremist when it comes to credit cards, we had 89 credit cards as of my last count, but once you understand how inquiries work, you’ll find the power to make good decisions with your inquiries whether you have 1 credit card or 5 credit cards.
How Inquiries Impact Your Score
Inquiries are not black and white. They are part of the mathematical formula that determines your credit risk.
Impact on Score. Credit scores are routinely modeled to weight around 10% of a score model to inquiries. However, 70% of the score is made up from payment history, utilization and balances. A late payment or delinquency on your credit report will drag your score down much more than an inquiry. If you are focusing on maintaining a stellar credit score, you should focus first on the areas of the score that are weighted most heavily.
Inquiry Maximums. Many models of credit scores use tiers to weight the inquiry portion of your credit score. For example, some tiers max out at 4 inquiries. If you have 4, 5, or 20 inquiries, it’s going to have the same impact on your score. Many models I have seen also diminish the impact of inquiries both over time and on the weight of the impact with each added inquiry.
You Don’t Need Perfection. I get it. The A-type personality in me agrees with all of you who think achieving a perfect credit score is something great. But let’s think school for a moment. In school, a 93% got you an A, and the A was just as good as a 100%. As long as your credit score is good enough to qualify for the best rates, perfection isn’t going to reward you any more. In fact, what if I told you that you can sell the other 7% for cash? (More about that below.)
Yes, inquiries do impact your credit score. But like most things in life, moderation is the key.
Tips to Manage Inquiries
In an effort to keep our credit score strong, here are some of the tips that we use when it comes to managing inquiries.
Rotate Spouses. Since the impact of inquiries fades after about six months, I often apply only for cards in my name for six months, then switch to my husband for six months. That way, during any part of the year we usually have one credit score that isn’t being used and is available for any unplanned needs. In addition, for companies that routinely check your credit score, like insurance, they’ll often use only one score, so it comes in handy to have one spouse with excellent credit if the other spouse doesn’t.
Rotate Credit Bureaus. Many companies still only check one credit bureau during an application. When I used to monitory my score more closely, I’d keep a log of which companies used each credit bureau. Then, when I wanted to apply for another set of cards, I’d spread the inquiries out.
Bunching Inquiries. I’m still a fan of the old App-o-rama from years ago when we would apply for about 2 dozen new credit cards in one sitting. The credit bureaus didn’t update as quickly and often didn’t see any inquiries made that day. While the reporting is quicker now, I still notice that many inquiries don’t show up for at least another day, so I still bunch a handful of applications into the same day. An added bonus, is that the impact of all the inquiries often falls off the report at the same time giving you a fresh slate to work with.
Price Your Inquiry. If you calculate the value of an inquiry, you can determine which offers are worth pursuing. For example, I’m almost always willing to sell an inquiry on my credit report for $500, but for $10, not so much (unless it’s a product I want to try out for readers). A lot of times the threshold moves depending on what is coming up in the future; if I know our insurance will be renewing soon, or we plan to refinance, the value will move up. If I have no use for my credit in the next few months, the threshold will drop, and I’ll apply for anything that I get a sign up bonus for. However, if you avoid inquiries altogether, you must realize it’s also a lost opportunity, since you’ll never get that time back on your credit report.
Using Adverse Action. I use two different methodologies to manage inquiries. For my own credit score, I keep pushing the envelope to see how many cards I can get before I get turned down. If I get a denial, I just cool it for 3-6 months before turning it on again. In my mind a letter of denial is a great tool to measure data points. For my husband, who believes that if he were turned down it would be a bad reflection on him (as opposed to just who he is married to), I often take some time to review his credit report in advance and make sure that his score is excellent before applying for a bunch of new cards.
When It Matters Most
There are a few times when I don’t screw around with my credit score and add a bunch of inquiries.
Mortgages. One is when I know we will be purchasing a new house. Obviously, a $50 sign up bonus would not be worth it in the long run if you have to pay an extra .125% on a mortgage over 30 years. Excessive inquiries can contribute to lowering your score to the point of getting adverse action when applying for a mortgage. And since your mortgage will likely be your largest expense, it’s not worth it!
For the record, even when we are planning a house purchase, I don’t put a complete moratorium on new inquiries. A new must have card that pays 6% cash back is almost always worth an inquiry for me! I would not, however, purposely put more than 1-2 new inquiries on my credit report before planning a mortgage application.
Beginners and Young Adults. The other time I reign it in is when I’m working with beginners. My young in-laws will get a very different message: one of very careful credit management and avoiding applying for a credit card just for a sign up bonus (or a free t-shirt on campus). In other words, do as I say, not as I do! Only after they learn to manage credit wisely (and for some of them, that time may never come) do we start talking about sign up bonuses.
Inquiry Action Plan
The bottom line is that, yes, if you sign up for new credit cards, it will impact your score. That however, should not scare you. Rather, it should be used as an informational tool. If you understand the impact that inquiries have on your credit score in relation to the other (much larger) components, and you understand the goals you have in the future (if you will be applying for a mortgage soon), you can use your credit score as a tool to improve your wealth.
And since I know you’ll ask, the current sales price for an inquiry on my credit report: $250. On my husbands: $500.
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