How Applying For New Credit Affects Your Credit Score
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If you have ever opened a cell phone account with a monthly plan, applied for a credit card or secured a loan, you have a . If youve had open accounts for several months, youll have a credit score too. Many Canadians have never paid a lot of attention to their credit score and many dont even know why it is important. If youre one of these Canadians, then this article is for you.
There are two credit reporting bureaus in Canada, Equifax and TransUnion. Creditors regularly report to one or both bureaus, also called Consumer Reporting Agencies , regarding the credit products that you use and how responsibly you use them.
If you are applying for a mortgage or other credit products, lenders look at your score to determine your creditworthiness. Employers, potential landlords, and insurance companies also have the right to pull your credit report, before approving your application.
You can contact Equifax or TransUnion, to view your own credit report and credit score. Its a good idea to check both companies annually because each receives slightly different information from your creditors. By keeping an eye on your credit history, you can spot and correct errors or potentially fraudulent behaviour that could hurt your credit score.
The Five Pieces Of Your Credit Score
Your credit score is based on the following five factors:
Ultimately, the best way to help improve your credit score is to use loans and credit cards responsibly and make prompt payments. The more your credit history shows that you can responsibly handle credit, the more willing lenders will be to offer you credit at a competitive rate.
Did you know? Wells Fargo offers eligible customers free access to their FICO® Credit Score plus tools, tips, and much more. Learn how to access your FICO Credit Score.
Hard Inquiries Vs Soft Inquiries
Any inquiry that may impact your credit scores is known as a hard inquiry. These inquiries are shown to others who order your credit reports.
Other inquiries are only shown to you when you order your own credit reports. They are not used when credit scores are calculated. They are called soft inquiries. Soft inquiries include credit checks by:
- Insurance companies
You know all those pre-approved offers you get in the mail? Those also result in soft inquiries.
Tip: When you review your credit reports, keep in mind the name of the company listed may be different than the name of the company where you applied. Thats because the lender may do business under another name.
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How Much Will Credit Inquiries Affect My Score
The impact from applying for credit will vary from person to person based on their unique credit histories. In general, credit inquiries have a small impact on your FICO Scores. For most people, one additional credit inquiry will take less than five points off their FICO Scores.
For perspective, the full range for FICO Scores is 300-850. Inquiries can have a greater impact if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk. Statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports. While inquiries often can play a part in assessing risk, they play a minor part are only 10% of what makes up a FICO Score. Much more important factors for your scores are how timely you pay your bills and your overall debt burden as indicated on your credit report.
How Many Points Will A Hard Inquiry Impact Your Credit Score
A hard credit inquiry could lower your credit score by as much as 10 points, though in many cases the damage probably wont be that significant. As FICO explains: For most people, one additional credit inquiry will take less than five points off their FICO Scores.
FICO also reports that hard credit inquiries can remain on your credit report for up to two yearsbut when FICO calculates your credit score, it only considers credit inquiries made in the past 12 months. This means that if your credit inquiry is over a year old, it will no longer affect your FICO credit score.
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What Does A Loan Application Have To Do With My Credit Score
Lenders use to assess your creditworthiness: Can they count on you to pay back a loan ?
Its all numbers and probability. Statistically, people with more credit inquiries are more likely to declare bankruptcy, meaning creditors are at risk of losing their money, according to FICO, a widely used credit score. So credit inquiries, particularly lots of credit inquiries at once, can be a red flag.
However, rate shopping for student loans, mortgages and auto financing that can result in multiple inquiries is treated a bit differently.
In those cases, you have a window of time during which you can apply for as many of those loans as you want with the same effect on your scores as applying for one. This is because lenders expect you to compare rates for those loans, and scoring models dont punish you for being financially savvy.
How Multiple Credit Checks For Rentals Affect Your Credit Score
If youre looking at a number of apartments to find one that meets your needs and your budget, several landlords may pull your credit report or check your credit score. But this isnt as damaging to your credit report as it might sound.
According to FICO, its scoring model allows for rate-shopping for consumers applying for a loan or, in this case, apartment-hunting for people seeking a place to live. FICO ignores inquiries made within 30 days of your apartment application. So, as long as your apartment hunt doesnt drag on for too long, your score wont be hurt by multiple credit inquiries.
The VantageScore credit scoring model only permits 14 days of rate shopping, but considers all inquiries made within that time as a single inquiry, regardless of the type of credit application. So, if you are trying to get a mortgage, cant find a suitable rate, and decide to rent instead, the hard pulls from your mortgage applications and tenant applications will all count as a single inquiry.
Rental denials do not show up on your credit report. If a landlord denies housing to a tenant or charges higher rent due to information in their credit report, the landlord must disclose how they obtained that information. The prospective tenant is then entitled to a free credit report.
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A New Auto Loan May Lower The Average Age Of All Your Accounts
The length of your credit history and the average age of your accounts make up 15% of your FICO score.
When you open a new loan or credit card, the average age of your accounts will fall slightly. If you have multiple accounts for decades, the hit will be very slight. But if you only have one or two accounts, it could have a bigger impact.
For instance, lets say youve held two credit cards for 20 years, and three others for 18, 16, and 15 years. You also took out a mortgage 17 years ago. The average age of your accounts is 17.6 years . When you open a new car loan, that average will drop to about 15 years still well over a decade.
But if youre new to credit and only have two credit cards that you opened a year ago, and you get an auto loan, the average length of your accounts drops in half, from one year to six months.
Inquiries And Rate Shopping
When youre shopping around for a mortgage or auto loan, you want to get the best rateand you should. You might worry that having your credit checked by several lenders could hurt your credit score.
The good news is that most credit score calculations treat all mortgage and auto inquiries as a single inquiry, as long as the inquiries are made within a certain period of time. For the latest version of the FICO score, this period is 45 days.
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Why Do Credit Inquiries Matter
When you apply for a credit card, begin shopping for a loan or prepare to take on a new financial responsibility, like renting an apartment, the lenders and companies involved want to know whether you are likely to be a financial risk. By conducting an inquiry into your credit history, these companies are able to assess your level of financial responsibility and the likelihood that you might default on your loan, miss credit card payments or skip out on the rent.
There are two different types of credit inquiries: Hard inquiries, which can have a negative effect on your credit score, and soft inquiries, which dont affect your score at all.
Other Accounts Included In A Credit Report
Your mobile phone and internet provider may report your accounts to your credit bureau. They can appear in your credit report, even though they arent credit accounts.
Your mortgage information and your mortgage payment history may also appear in your credit report. The credit bureaus decides if they use this information when they determine your credit score
A home equity line of credit that is added to your mortgage may be treated as part of your mortgage in your credit report. If your HELOC is a separate account from your mortgage, it is reported separately.
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Frequently Asked Questions About Soft & Hard Credit Checks
Knowing the difference between a soft credit check vs hard credit check will help you make decisions that could affect future credit applications. However, you might also have specific points of confusion about either or both types of credit inquiries. Here are quick answers to 6 frequently asked questions:
What is a soft inquiry?
A. Soft credit inquiries check the info in your credit report without affecting your credit rating. Examples of when a soft inquiry happens are when you check your credit report yourself, when you allow a potential employer to check your report, and when a credit card company you already deal with tries to prequalify you for a credit product.
Can you fail a soft credit check?
A. Yes, you can fail a soft credit check. But ultimately, its up to the company doing the soft credit check to decide if the info they receive passes or fails their requirements. For example, a potential employer might decide that a candidates credit history disqualifies them from the job, or a landlord might reject a potential tenant based on their credit report.
Does a soft credit check affect a mortgage application?
A. Because soft credit checks do not affect your credit rating, they will have no effect on a mortgage application. However, a mortgage application will require a hard credit check, which does affect your rating.
What does a hard credit check show?
How many points does a hard inquiry affect a credit score?
Business Credit And Inquiries
Most business credit scores dont take inquiries into account. But credit managers who review business credit reports may balk at extending credit or financing to some with too many recent inquiries. But as a business owner, the lender may check your personal credit when you apply for a small business loan or financing, and that may affect your personal scores, or business credit scores such as the FICO SBSS which often includes both personal and business credit data.
Pro tip: What you dont know can kill your business
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What Is Your Credit Score
The credit bureaus use the information in your file to calculate your credit score, usually between 300-900:
- Very Good
If you have a very low score, youve probably had some difficulties in your credit history, such as a delinquent account or bankruptcy, and you may have a tough time getting approved for new credit. If you have a top score, lenders will see that you pay your bills on time, all the time and will be more likely to lend you the money you want.
To learn more about credit score ranges, .
Can Your Credit Score Affect Your Employment
Having bad credit can make it difficult to get approved for a loan or a credit card but in some cases, it can also prevent you from getting a job.
According to a 2018 National Association of Professional Background Screeners study, 47 percent of employers run credit or financial background checks on candidates. Whether or not youll be one of those candidates depends on the type of job youre applying for.
Why Employers Care About Your Credit History
Before we go any further, its important to know prospective employers cannot see your credit score. Instead, they can check your credit report, which is what your score is based on.
But why do employers care about your credit report at all? Simply put, certain aspects of the report can be indicative of habits or behaviors they dont want in the workplace.
For example, if you have several delinquent credit accounts, that may signal youre unorganized or dont keep your word. If you have excessive debt or several credit cards with high balances, it can suggest youre desperate and might be more likely to steal from or defraud the company.
The belief is that putting in a position with access to large amounts of cash or in any other kind of financial role could provide them the means to resolve their financial difficulties the wrong way, says Adam Calli, a human resources consultant with Arc Human Capital.
Which Jobs Are More Likely to Require Credit Checks?
How to Prevent Your Credit From Affecting Your Employment
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How Much Does A Hard Inquiry On Your Credit Report Hurt
For people with extensive credit histories, a single credit application and hard inquiry has no effect or a fairly minimal one.
If youve lost points because you applied for a lot of credit in a short time span, take heart. Credit applications are not a major factor in calculating your credit scores.
VantageScore describes recent credit behavior and inquiries as less influential. Applications for new credit account for 10% of FICO scores.
But people who have short credit histories or few accounts may see a bigger change.
If youre trying to build credit, every point counts, and pulling back on new applications for a few months should restore lost points. Particularly if you are taking out a mortgage, wait until after closing to apply for new credit.
Multiple hard inquiries can put a serious dent in your credit, particularly if you are new to credit, and its an easy mistake to make. Say youve just rented an apartment. The leasing agent may check your credit. And then you may apply for financing for furniture. Then you decide you want a card with travel rewards, so you apply for a couple of those. That could be four credit inquiries within a short period, and it could result in a lower score.
Statistics cited by FICO show that people with six or more recent inquiries are eight times as likely to file for bankruptcy as those with none, and scoring formulas reflect that.
In the meantime, focus on the two things that have the most powerful effect on your scores:
What Doesnt Affect Your Credit Score
Typically, there are lots of myths and falsehoods swirling around about what affects your credit score and what doesnât. Hereâs a list of common misconceptions â things that donât have any impact on your credit score:
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