The following question about the variable impact of credit inquiries to your credit scores was submitted via Mint’s Facebook page.
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Question: When applying for a mortgage, I heard you can apply multiple times within 30 days and it only dings your credit once.
Does the 30 days start on the day of the first inquiry or 30 days from the most recent inquiry?
How much does it really affect your credit to have multiple pre-approvals?
Answer: Now, I’ve certainly written about credit inquiries before and have done so for Mint on occasion. But, this question isn’t really the same as, “What is a credit inquiry?”
The reader is asking a more detailed question about how scoring systems treat certain types of inquiries over different periods of time.
It’s been my experience that this variable treatment of credit inquires is one of the most difficult things to clearly explain.
What the Minter addressed in his question is the fact that FICO scores contain complex logic that attempts to differentiate credit inquiries caused by rate shopping, versus those caused by actually opening a new credit account.
For example, you can go to a car dealership, take a test drive, and then ask the Finance and Insurance Manager to shop out your credit to see what kinds of financing offers you can get from their lender partners.
Or, you can go to several mortgage brokers and get several good faith estimates, but they all need to pull your credit reports and, therefore, leave behind a credit inquiry.
In neither scenario has the consumer actually taken on any new debt, but it appears as though they’re thinking about it.
The challenge for the credit scoring system is to account for the added risk of the consumer shopping around for credit, but at the same time not penalizing him or her for being a smart consumer who is shopping for the best deal possible.
This is accomplished by FICO’s inquiry treatment logic.
How Does It Work?
The first thing the FICO score does is determine from which industry the inquiry was generated. That is very easy because inquiries are coded at the credit bureaus by industry.
So, a FICO score, and any other credit scoring system, uses the codes to tell the difference between a mortgage, auto, student loan, credit card, insurance and every other possible inquiry.
That’s important because the following logic only applies to mortgage, auto and student loan inquiries.
Now that FICO has identified a mortgage, auto or student loan inquiry on your credit report, the next thing is to determine how old the inquiry is.
This is important for two reasons. First, inquiries of any variety that are over 12 months old no longer count in your score.
Second, if the mortgage, auto, or student loan inquiry is less than 30 days old, it is ignored and doesn’t count in your score at all.
If the mortgage, auto or student loan inquiry is less than 12 months old, but greater than 30 days old, it’s fair game and can be considered when calculating your score.
If FICO finds a “fair game” inquiry, then the model looks for other similar credit inquiries that have occurred within the same 45-day period and treats the group as just one inquiry.
The model assumes that you’re shopping for the best interest rate and not taking out two mortgages, two auto loans or multiple student loans.
Let’s do some examples of this logic and how it works with different inquiry scenarios.
Credit Card Inquiries
If you have four credit card inquiries that occurred 14, 28, 56 and 76 days ago, how would FICO interpret them?
This is a trick question because credit card inquiries are not subject to the aforementioned logic.
So, those four credit inquiries will be counted as four inquiries because you don’t shop around for the best interest rate for a credit card like you do for a mortgage, auto or student loan.
Auto Loan Inquiries
If you have four auto loan inquiries that occurred 14, 28, 56 and 76 days ago, how would FICO interpret them?
These four inquiries would be treated as one for the calculation of your score.
Can you explain why?
The first two (occurring 14 and 28 days ago) are both less than 30 days old, so they’re ignored.
The second two (occurring 56 and 76 days ago) are within 45 days of each other, so they’re counted as only one inquiry rather than two because the assumption is you’re shopping for a loan, not taking out two car loans.
Mortgage Loan Inquiries
If you have seven mortgage inquiries that occurred 3, 5, 8, 28, 56, 76 and 370 days ago, how would FICO interpret them?
Again, the four that are less than 30 days old would be ignored. The one that’s 370 days old is older than a year and therefore ignored.
And, the two that occurred on day 56 and 76 are within 45 days of each other and are treated collectively as just one inquiry.
Whatever you may think about FICO or credit scoring, it’s hard to argue that this isn’t extremely consumer friendly.
It allows for almost untethered freedom to shop for rate variable loans without worrying much, if at all, about your credit scores.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.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. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.