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Every time you apply for credit, it creates a credit report inquiry. It shows other lenders that you applied for new credit. A credit inquiry can hurt your credit score, but not as much as you think.
Just like anything in life, though, too much of anything isn’t good, so how many inquiries are too many? I help you understand how it works below.
How Do Credit Inquiries Affect Your Credit Score?
Credit inquiries have a small effect on your credit score IF you only have one or two. If you have a lot, it could have a detrimental impact not only on your credit score but how lenders view you.
Credit inquiries tell lenders you applied for new credit. That’s usually no big deal – everyone applies for new credit. But, if you apply for too many credit lines, it’s a sign of desperation, aka financial trouble.
Overall, credit inquiries hit your credit score around 5 points. Not a big deal in the grand scheme of things.
BUT, if you have say 5 inquiries for different companies and types of credit, that could be a significant hit to your credit score and your future lending abilities.
How Many Inquiries Is Too Many?
How many inquiries are too many depends on a few factors – your credit score before the inquiries and a lender’s threshold.
Typically, consumers with good credit don’t feel the impact of credit inquiries much. But if you have a borderline credit score (between good and fair or fair and poor), it could be the factor that throws you over the edge.
Lenders, however, each have their own threshold. One lender might say two or three inquiries is too much. Other lenders are more conservative and are okay with up to six inquiries.
You may want to play it safe and keep it to a minimum, though.
Related: Hard vs Soft Inquiries
Reduce the Impact of Credit Inquiries
If you need new credit, there will be inquiries, but you can reduce the impact in a few ways:
Raise your credit score
The higher your credit score is, the less credit inquiries affect it. There isn’t much difference between a 780 and a 775-credit score, for example. Raising your credit score isn’t as hard as it sounds.
Pay your bills on time, don’t overextend your existing credit lines, and have a good mix of installment and revolving debt.
Related: Credit Hacks
Only apply for credit you need
Avoid applying for every pre-approval that crosses your path – you’ll get a lot of them whether you have good or bad credit. Think carefully before applying for a credit card or mortgage. Do you need it?
Shopping for Rates: Does That Hurt My Credit Score?
The credit bureaus expect you to comparison shop. Why shouldn’t you, right?
Here’s the good news.
It won’t hurt your credit score IF you do it right—comparison shop within a short period. FICO calls 45 days a short period. So you have a month and a half to find the right rate. Any inquiries outside of that 45 days will count as another inquire.
This only works IF you have inquiries for the same type of loan. For example, if you’re shopping for a mortgage, you’ll only get hit for one inquiry if you get quotes for multiple mortgage loans. If you throw in a credit card or car loan in there, that doesn’t count.
Pro Tips for Rate Shopping
So how do you minimize the inquiries while rate shopping? Here are my favorite tips.
#1. Always Check Your Credit Report
Don’t apply for new credit without checking your credit report. Look at your credit history. What could you improve? Ask yourself the following:
- Do you have late payments you can bring current?
- Have you overextended any of your credit cards?
- Do you have a good mix of revolving debt and installment debt?
- Is there any incorrect or fraudulent information on your credit report? (dispute it if there is)
#2. What to Watch Out For: Status of Current Accounts
Pay the most attention to your current accounts. How do you handle them? If you are late, don’t bother applying for new credit right now. Wait until you are no longer delinquent. I’d recommend at least 6 months after you get current.
Also, look at your current balances compared to your credit line. You shouldn’t have more than 30% outstanding at one time. For every $1,000 in credit limit, you shouldn’t have more than $300 outstanding.
Your credit report will have a status for each account that you should familiarize yourself with:
- Pays as agreed – You pay your bills on time.
- Paid/Closed Never Late – This is for installment loans mostly, once you pay them as agreed, the loan ends. If you were always on time, it will have this status.
- Account paid as agreed or settled for less than the full balance – If you ran into trouble and needed a payment arrangement or the creditor accepted less than the full amount, this will be your status.
- 30/60/90/120 days past due – If you pay your bill more than 30 days late, it will show how many days late you paid it. Future lenders can always see that you paid bills late.
#3. Pay Attention to Your Credit Habits
Lenders look at your credit habits over the last 2 years. If you have a pattern of late payments, that won’t work in your favor.
Also, if you have a habit of overextending your credit, lenders frown upon that. They’re looking for borrowers with good credit habits.
They want borrowers who use their credit responsibly, don’t apply for excessive amounts of credit and pay their bills on time.
Related: Best Credit Repair Companies
Bottom Line: How Many Inquiries is Too Many
Inquiries aren’t the best thing for your credit score, but they aren’t the worst either. If you time it right and only apply for credit when you absolutely need it, you should not see much of a difference in your credit score.
If you want to consistently review your credit report, then consider credit monitoring. Paying for a service is well worth it if you are concerned about your credit score.