First Connecticut Mortgage Newsletter May 2006

Why Is Your Credit Important: Part Four

THE TRUTH ABOUT CREDIT INQUIRIES - CAN THEY REALLY HURT YOU?

Brought to you by Reynold Nippe

We are bombarded daily with new credit offers! It seems that everywhere we turn, someone is advertising a “special offer” for a new credit card, a new interest rate, or even a new spending limit. These days, its gotten so bad that we can’t go to the mall, a department store, or to our own mailboxes without someone asking us to apply for an additional line of credit. Have you seen the one that says, “YOU have been PRE-APPROVED for a $5,000 credit card?” We all have. No matter where you live, its almost impossible to escape this marketing frenzy.

Regardless of the reason you respond to a credit offer —the holidays, an emergency, a great sounding offer—you should always be aware that credit card companies will immediately run a credit inquiry which may cause you, depending on your circumstances, to lose between 5 and 30+ points from your score.

What’s Going On?

According to Fair Isaac & Company, the creator of the credit scoring model, the very process of applying for new credit makes up 10% of your credit score. For most people, this factor is one of the least understood aspects of the scoring system, and most of us have no idea how to protect ourselves. Therefore, let’s break it down.

There are two types of inquiries that you need to know about—soft inquiries and hard inquiries. Here’s the difference:

Soft Inquiries do NOT affect your credit score. Here are some examples of what would be considered soft inquiries:

• When YOU pull your own credit
• When one of your existing creditors does a periodic review of your credit. This is called an account review
• When a creditor has purchased your name from the credit bureaus for the purposes of sending you some sort of credit solicitation in the mail. This is called a promotional inquiry
• When an employer checks your credit before hiring you
• When you apply for auto insurance
• When a landlord checks your credit

Hard Inquiries DO affect your score. A hard inquiry occurs when you apply for a loan, a credit card, or any type of credit. Here are some examples of what can cause a hard inquiry to show up on your credit report:

• Applying for a mortgage or home equity line of credit
• Applying for an auto loan
• Applying for a credit card
• Applying for a student loan
• Filling out and returning “pre-approved” credit offers you receive in the mail
• Applying for “instant credit” offers when you are at the shopping malls
• Applying for credit on the internet

Why do creditors even care about this?

You may be wondering why this information matters to your credit score. From a creditor’s point of view, consumers who are actively looking for credit, or have “excessively” shopped for credit in the past 12 months, are generally a higher credit risk than consumers who have not. In addition, the potential creditor has no idea that those inquiries have not resulted in a recent loan which could disqualify you from being approved.

Statistical studies also show that multiple inquiries can often be associated with a high risk of default and that distressed borrowers who are desperate for assistance are known to contact many lenders in hopes of finding someone who will approve them, whether they can afford the new credit line or not.

So How Can You Shop For Credit Without Hurting Your Score?

The good news is that Fair Isaac realized that consumer's shouldn't be penalized for something as logical as shopping around for the best interest rates before making buying a car or home, so they came up with something called De-Duplication. What it means is this.... Consumers can have their credit pulled by as many mortgage or auto lenders as they want within a 14 day period, and it will only be counted as one hard inquiry against their score. And even better news is that the new scoring model released by FICO has expanded the 14-day period to 45 days. Note: Not all lenders are using the new model yet, so it is best to be safe and do your shopping in a 14-day period.

SUMMARY: What you need to know

• Hard inquiries will remain on your report for two years, but will only affect your score for one year
• Hard Inquiries can cost anywhere from 2-30+ points. It all depends on how the rest of your factors are being managed. If you have a score below 620, an inquiry will cost you more points than someone with a 720 score
• Good news. Multiple auto or mortgage inquiries in any 14-day period are counted as just one inquiry
• Bad news. The credit scoring system DOES NOT like third party credit card inquiries (i.e. Macy’s, Home Depot, etc.), so avoid discount offers from department stores. Saving 15% on your first purchase is probably not worth the credit hit
• Finally, keep in mind that when you receive unsolicited mail that says, “You are Pre-Approved,” it does NOT mean you are pre-approved. As soon as you pick up the phone to call the creditor, they will pull credit and your score will go down immediately. Note: Inquiries for promotional cards are considered especially negative because it appears that the consumer is desperate.

How to Dispute Inquiries

In light of what we have discussed, it would be a good idea to check your credit report in order to unveil the impact of credit inquiries on your score.

Step 1 - Order Your Credit Reports & Scores
The first step is to have a complete picture of your current credit situation by ordering your credit report and score for all three national credit bureaus, TransUnion, Equifax and Experian. You should get your score from all three bureaus for two reasons. First, each bureau may have slightly different information about you depending on which companies have reported to them on your accounts. Second, many lenders, especially mortgage lenders, look at all three of your FICO scores to determine whether to grant credit – for everything from a car loan to a home loan to a credit card to a cell phone. Do not have a creditor pull your reports because you will lose points for a hard inquiry.

You can pull all three credit reports and scores for $1.00 at www.privacyguard.com. Please be sure to read terms and conditions of the Privacy Guard Agreement.

Step 2- Verify the Data Being Reported About YOU
It is the consumer's responsibility to verify that the data being reported is accurate. Look toward the end of your credit report to find the inquiries that are being reported. If there are inquiries that you do not remember authorizing, then go to the next step.

Step 3- Dispute the Inaccurately Reported Information Immediately
Find the creditor address and contact information for each inquiry that you do not recognize. If you are unsure of whether or not it is a soft or hard inquiry, dispute it anyway. You have nothing to lose.

Prepare letters to each creditor asking them to remove their inquiry. The Fair Credit Reporting Act allows only authorized inquiries to appear on the consumer credit report. You must challenge whether the inquiring creditor had proper authorization to pull your credit file. Note: Some of your creditors may provide documentation that a credit inquiry was authorized by you. Read the authorization that you signed very carefully. If there is any vagueness at all, you can write back and argue that the inquirer's authorization form was too complicated and not easily understood by the layman. You can threaten to contact the State Banking Commission and complain about a deceptive and unclear authorization form if they don't remove the inquiry. However, some creditors will try to ignore your challenge. Be sure to send each letter via Certified Mail Return Receipt Requested and keep close track of the time that you sent the letter. If the inquiring creditor doesn't respond within thirty days, you will have ample grounds to call the inquiring creditor and demand some action. At that point, it's almost irrelevant whether or not you authorized the inquiry. Now the issue becomes the creditor's lack of response to a consumer dispute. Be sure to hold your ground. Demand that the inquiry be removed immediately in order to prevent you from going to the State Banking Commission. In the end, many of your inquiring creditors may simply agree to delete the inquiry as a courtesy or because they cannot verify your authorization.

In Conclusion:

It is critical for all of us to understand every aspect of our credit report. As we know now, new credit accounts for 10% of our credit score, and hard inquiries, which we now understand, is considered a component of the new credit quotient. Even though 10% sounds like a small number, it can become a very big deal—a huge deal—when it prevents us from obtaining the credit we need. If you don’t remember anything else, please remember that credit inquiries always impact your bottom line. Don’t let this seemingly small issue turn into something that undermines your life. Do the things that are necessary to enhance your future and financial wellbeing. Check your credit report for inaccuracies. Don’t be taken by false claims. And most of all, don’t think that your credit score is going to magically improve. By managing this important aspect of your credit profile, you’ll be one step closer to earning the credit we all need and desire.

All the best.