Posted on: Thursday, May 12, 2005

THE COLOR OF MONEY
How inquiries might affect your personal credit rating

By Michelle Singletary

When you go shopping for a car or a home, do you become a little concerned when you hear these words: "Can I pull your credit report?"

Lots of consumers bristle, for they know (or think they know) that this means a credit inquiry could be posted on their credit report. The credit-smart folks out there understand that with too many credit inquiries, their almighty credit scores (generated by each of the three major credit bureaus) could take a hit.

A reader wrote to say this: "I hear that every time you test-drive a car the dealership runs a credit check, and since the big three credit reporting companies penalize you (i.e., lower your credit rating) for more than three credit checks within a certain time period, the test-drives can cost you."

Is this reader right?

I put the question to the all-knowing Fair Isaac, the company that created the FICO credit-scoring model many lenders use.

"It's ironic that so much attention gets focused on credit inquiries because they are such a tiny part of the FICO score," said Craig Watts, public affairs manager for Fair Isaac.

For starters, Watts dispels the notion that there is an inquiry quota of three. "That's a myth," he said.

But perhaps it would help if I first explained why the scoring models count inquiries or requests a lender makes for your credit report or score when you apply for credit. Lenders use scores to assess how risky a borrower might be. Multiple credit inquiries could indicate someone is having money problems and needs lots of credit.

So here's the truth about credit inquires, according to Fair Isaac:

• The credit-scoring model recognizes that many consumers shop around for the best interest rates before purchasing a car or home, and that their searching may cause multiple lenders to request their credit report. To compensate for this, multiple auto or mortgage inquiries in any 14-day period are counted as just one inquiry.

• In the newest formula used to calculate FICO scores, that 14-day period has been expanded to any 45-day period, Watts said.

The newest FICO version went online at all three credit agencies — TransUnion, Equifax and Experian — in 2004, Watts said. Typically, it takes lenders months to adjust their processes so they can accommodate revised formulas, and some lenders never adjust, he added.

• The FICO score ignores all mortgage and auto inquiries made in the 30 days before scoring. If you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping.

• Each "hard" credit inquiry (meaning the consumer actually has applied for credit) that is counted normally subtracts no more than five points from a person's score. Often, no points are subtracted.

• The score does not count inquiries a lender has made for your credit report or score in order to make you a "preapproved" credit offer.

• The formula doesn't count inquiries made by a lender reviewing an account you already have with them.

• Inquiries that come from employers are not counted. Nor is it counted when you ask to see your own report.

Michelle Singletary writes for the Washington Post.