How Many Points Will An Inquiry Lower My Credit Scores?

The fact that inquiries have the potential to lower consumer credit scores is not breaking news. Credit savvy consumers know that letting too many lenders pull their credit reports in a short period of time is a bad idea (with the exception of rate shopping for a mortgage, auto loan, or student loan within a 45 day period). However, the idea that inquiries lower your credit scores a particular number of points is a complete myth.

There is nothing on a consumer's credit report that raises or lowers your scores a fixed number of points. For example, an inquiry does not always lower your score 4 points (or 3, 5, or 6 points for that matter). An on-time payment does not raise your credit score 5 points. A late payment does not lower your scores 30 points. That is simply not the way that credit scores work.

How Inquiries Actually Impact Your Credit Scores

Remember, not all inquiries will have a negative impact upon your credit scores. (CLICK HERE to read The Difference Between Hard and Soft Inquiries for more information.) However, as mentioned above, those hard inquiries which do have the potential to negatively impact your credit scores are not going to lower those scores a specific number of points per inquiry that occurs.

Instead, imagine a set of 5 buckets lined up side by side. Each bucket bears a sign which represents the number of inquiries which appear on a consumer's credit report over a period of the past 12 months.

  •  Bucket #1 = 0 Inquiries
  • Bucket #2 = 1-2 Inquiries
  • Bucket #3 = 3-4 Inquiries
  • Bucket #4 = 5-6 Inquiries
  • Bucket #5 = More than 6 Inquiries
    *
    NOTE: These are hypothetical categories for demonstration purposes only.

Since inquiries account for 10% of your FICO credit scores and the range of FICO scores is 300 - 850 (550 total available points) then there could be the potential for a consumer to earn up to 55 points for her credit scores in the inquiry category. Here's a hypothetical look at how credit score points might be awarded within the inquiry category of a consumer's credit report.

  • Bucket #1 = 0 Inquiries = 55 points
  •  Bucket #2 = 1-2 Inquiries = 45 points
  • Bucket #3 = 3-4 Inquiries = 15 points
  • Bucket #4 = 5-6 Inquiries = 5 points
  • Bucket #5 = More than 6 Inquiries = 0 points
    *
    NOTE: These are hypothetical categories for demonstration purposes only.

While the points listed above are not an exact representation of how many points a consumer's credit score would receive based upon her number of inquiries, the concept is an accurate representation of how credit scores are calculated within the inquiry category. In the example above if Jane Doe had a credit report with 3 inquiries then she would receive 15 points (of the 55 available points within the category) to be added to her overall credit score. However, if Jane Doe had no additional credit inquiries and the 3 inquiries became over 12 months old then she would move to the "0 inquiry" bucket and would receive 55 points instead of the mere 15 points she had received previously. In the case of this example Jane's credit score would increase by a whopping 40 points once the 3 previous inquiries aged out of credit score calculation range and she moved to the "0 inquiry" bucket.

When it comes to inquiries just remember that the fewer hard inquiries the better it is for your credit scores. (Soft inquiries which typically occur when you check your own credit are fine. They never lower your scores.) Now that you understand that individual credit inquiries are not worth a particular number of points, congratulations! You now understand more about your credit scores than probably 99% of the population. 


credit-expert-michelle-black

About the Author: Michelle Black is an author and leading credit expert with over a decade of experience in the credit industry. She specializes in the areas of credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Facebook here


The Difference Between Hard Inquiries and Soft Inquiries

Credit scores, like FICO and Vantage Scores, are based upon a variety of factors. For FICO scores the factors which make up an individual's credit scores fall into 5 categories. The least influential categories, Mix of Credit and Inquiries, each account for 10% of a consumer's credit scores.

While 10% may seem like a small percentage, and it is small in the grand scheme of your credit scores, it is not an insignificant number of points. FICO credit scores range from 300 - 850. That's a total of 550 points that any given consumer has the opportunity to earn for her credit scores. Since the Inquiry Category accounts for 10% of those points there could be a potential 55 points up for grabs (depending upon the score card being used to determine the consumer's scores).

Why Inquiries Appear on Credit Reports

Whenever anyone requests to see a copy of your credit report a record known as an inquiry is placed on your credit report. In fact, most consumers do not realize that the reason that the credit bureaus place inquiries (aka records of credit pulls) on their credit reports is due to the fact that the Fair Credit Reporting Act [FCRA 15 USC Sec. 1681g(a)(3)(A)] requires the credit bureaus to record whenever a consumer's credit report is accessed for a period of at least 1-2 years, based upon the type of inquiry. In an effort to comply with the FCRA the credit bureaus have made a blanket policy that all inquiries will remain on a consumer's credit report for 2 years.

Hard Inquiries

Credit inquiries can be sorted into one of two categories - those that may have the ability to negatively impact a consumer's credit scores and those which do not have the ability to negatively impact a consumer's scores. Inquires which have the potential to cause credit score damage are known as "hard" inquiries. Not all hard inquiries will automatically cause credit score damage and, in special circumstances, numerous hard inquiries might be counted as only "1" inquiry for credit scoring purposes. Below are some examples of hard credit inquiries.

  • Credit Card Applications
  • Mortgage Applications
  • Auto Loan Applications
  • Collection Agency Skip-Tracing
  • HELOC (Home Equity Line of Credit) Applications

Soft Inquiries

Inquiries referred to as "soft" are treated differently by credit scoring models than "hard" inquiries. Soft inquiries are still able to remain on consumer credit reports for 2 years; however, soft inquiries do not have any impact upon credit scores whatsoever. They will not help nor hurt a consumer's credit scores. Here are some examples of soft credit inquiries.

  • Checking Your Own Credit Reports
  • Promotional Inquiries (Think pre-approved credit card offers)
  • Your Current Lenders Checking Your Credit Reports

Inquiries and Your Credit Scores

Consumers often find it frustrating to learn that certain inquiries have the ability to negatively impact their credit scores. The reason that hard inquiries may lower your credit scores is because inquiries can be a reliable indicator of credit risk. In other words, when FICO reviews credit reports samples it finds a trend which demonstrates that people who apply for a lot of credit in a short amount of time are more likely to pay their bills late. People who apply for credit less often are less likely to pay their bills late. Therefore, people with fewer hard inquiries are usually rewarded with higher credit scores.  

About the Author: Michelle Black is an author and leading credit expert with over a decade of experience in the credit industry. She specializes in the areas of credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Facebook here

How Do I Know When Something Has Been On My Credit Report for Too Long?

Overcoming past credit problems can sometimes be a long, tedious process (especially if you are going it alone without professional assistance). However, thankfully there is a strict time limit regarding how long past credit mistakes are allowed to haunt your credit reports. In other words, most negative credit information is not allowed to remain on a consumer's credit report forever.

What Determines When Items Are Removed from Credit Reports?

The Fair Credit Reporting Act (FCRA) provides set-in-stone guidelines to the credit reporting agencies - Equifax, Trans Union, and Experian - which instructs them when an item must be removed from a credit report. That date is known by a couple of different names: the "FCRA compliance date" and/or the "purge date." Depending upon the type of credit item in question, the purge date will be different. However, the credit reporting agencies (CRAs) always rely on the information provided to them from data furnishers - aka your creditors - in order to determine the date when an item should be purged from your credit report. (The exception to this rule is in the case of public records where the credit reporting agencies proactively seek out this information and no "data furnisher" is involved.)

As mentioned above, the time frame for removal varies depending upon the type of credit report item in question. Due to the difference in purge date timelines, the subject of when an item should be removed from a credit report creates a lot of confusion amongst consumers, and even among many professionals as well. Check out this handy guide if you need help determining when an item should be purged from your credit reports.

2 Years

Inquiries - After a period of 2 years, inquiries are removed from your credit report by the credit reporting agencies (CRAs). The FCRA [15 USC Sec. 1681g] (a)(3)(A) requires that the CRAs maintain a record of employment inquiries for a minimum of 2 years and other inquiries for a period of 1 year. As a policy the CRAs maintain most inquiries, regardless of their purpose, for 2 years.

7 Years

Charge-Offs - These accounts must be purged from your credit report after 7 years from the date of the charge-off.  

Judgments - After 7 years from the filing date a judgment is required to be purged from your credit reports. However, creditors do have the option to try to re-file the judgment and, if the re-filing is granted, the judgment could remain on your credit report for an additional 7 years.

Repossessions and Foreclosures - The purge date for repossessions is 7 years from the date of the original terminal delinquency (when the account became 6 months past due without being brought current again) on the original loan.

Collections - Collection accounts are required to be purged from your credit reports after a period of 7 years from the date of default on the original account. Collection agencies are not legally permitted to tamper with the purge date in any way. This practice is known as "re-aging" and is prohibited under the FCRA.

Released Tax Liens - Tax liens which have been paid and released must be purged from your credit reports after a period of 7 years from the date of release.

Chapter 13 Bankruptcy - The purge date for a chapter 13 bankruptcy is 7 years from the date the bankruptcy is discharged. However, as it can take several years for a repayment plan to be completed, the maximum amount of time a chapter 13 bankruptcy is allowed to remain on a credit report is 10 years from the date of filing, even if 7 years from the date of discharge has not yet passed.

10 Years

Chapter 7 and 11 Bankruptcies - Chapter 7 and 11 bankruptcies must be purged from your credit report 10 years after the filing date.

Non-Discharged and Dismissed Bankruptcies - These 2 categories of bankruptcies are also required to be purged from your credit reports after 10 years from the filing date has passed. 

Never

Federal Student Loans - The FCRA does not govern how long negative student loan account information is allowed to remain on your credit reports. Instead, federal student loan credit reporting is governed by the Higher Education Act. Unpaid federal student loans are not required to be removed from your credit report...EVER.

Unpaid Tax Liens - There is no purge date associated with unpaid tax liens. In other words, unless you pay a tax lien it can remain on your credit reports, damaging your credit scores forever.

Immediately

Withdrawn Federal Tax Liens - If you have paid a federal tax lien or entered into an arrangement to pay a lien in full then you may be eligible to receive a withdrawal of the lien under the IRS Fresh Start Program. Currently the credit reporting agencies do not report withdrawn tax liens on consumer credit reports so if you dispute a withdrawn lien and include proof of the withdrawal the lien can be removed from your credit reports immediately.

What to Do about Re-Aging

If an account is currently showing up on any of your credit reports which is past its purge date, then you may have been the victim of re-aging. Re-aging occurs when a data furnisher (usually a collection agency) either accidentally or purposely reports an incorrect purge date to the credit reporting agencies. Re-aging can be disputed with the credit reporting agencies directly and it is very helpful if you can provide proof as well.

About the Author: Michelle Black is an author and leading credit expert with over a decade of experience in the credit industry. She specializes in the areas of credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Facebook here

The Ideal Credit Card Balance to Optimize Credit Scores

As a reader of the GreatCredit101 Blog you already know that credit cards can be a very powerful tool - when used properly - to help drive your credit scores upwards. A credit card with a $0 or very low balance can potentially help to give your credit scores a substantial boost. However, many consumers and even professionals within the mortgage and real estate industries are often confused regarding the best possible balance a consumer can carry on their credit cards. Let's take a look at the truth.

FICO rewards consumers (with points added to their credit scores) when the consumer has a 0% utilization ratio on a credit card or, in laymen's terms, a $0 balance. However, FICO rewards consumers just a little bit more when they have a 1% utilization ratio. What does a 1% utilization ratio look like? Here are a few examples:

1. On a credit card with a $300 credit limit a balance of $3 = a 1% utilization ratio. 2. On a credit card with a $500 credit limit a balance of $5 = a 1% utilization ratio. 3. On a credit card with a $1,000 credit limit a balance of $10 = a 1% utilization ratio.

This means that if a consumer has a credit limit of only $300 and they are carrying a $10 balance then the consumer is above the 1% utilization ratio and, therefore, is not receiving the full potential score benefit from that card. In fact, the consumer is losing some of the points that he or she would receive if the same card had a $0 balance. However, on a credit card with a $1,000 credit limit then carrying a $10 balance is a good idea in order to receive the maximum points available. Don't look at a zero balance as a bad thing. It is awesome. But, a 1% balance on a credit card is one rung higher on the awesome scale.  

Another factor to consider is how difficult it is to actually have a precise 1% balance show up on a consumer's credit report vs. a $0 balance. Let me give you another example. Joe Consumer wants to boost his credit scores as much as possible before applying for an upcoming mortgage loan. Joe has a VISA with a $300 limit. Joe knows that 1% credit card utilization ($3 on his $300 VISA) can help to improve his scores. So Joe goes to his local mall on July 1st and charges $50 on his VISA. Unbeknownst to Joe, VISA reports the $50 balance on July 3rd. On July 5th Joe pays the $50 balance down to $3 which equals a 1% utilization ratio on his VISA card. However, on July 10th when Joe's loan officer pulls his credit report the balance on his VISA is being reported as $50 NOT $3. Joe's limit of $3 will not be reported to the credit bureaus by VISA until August 3rd (assuming that Joe does not use the card for any additional purchases in the meantime). Because Joe's VISA is at a $50 balance, which is a little over a 16% credit utilization ratio, Joe lost potential points that he could have gained with a $0 limit.

Therefore, my recommendation in most cases is still that a $o balance on a credit card is the best way to go to help boost credit scores. If you have time to play around with your balance for at least 60 days prior to a loan to try to reach the perfect 1% credit card utilization ratio - go for it! Never turn down extra potential points. However, if you know that you are going to be applying for a large auto loan or mortgage within the next 45 days then your best bet is to keep a $0 balance. Either way you go - $0 balance or 1% credit utilization ratio - you will be showing the credit bureaus that you are a good credit risk. While you have the right to fully utilize the entire credit limit on your credit card accounts you are choosing to exercise discipline and financial restraint. In other words, you are not maxing out your credit cards each time the shoe store comes out with its hottest new releases. Showing the credit bureaus that you have this discipline and restraint can result in a reward - extra points for your credit scores!

Have credit card debt that you need to consolidate? CLICK HERE to compare consolidation options.

About the Author:

Michelle Black is an author and leading credit expert with over a decade of experience in the credit industry. She specializes in the areas of credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Facebook here

Incorrect Personal Data on Credit Report

Errors occur on credit reports. This is a fact, and it's not really breaking news to anyone at this point either. In fact, the Federal Trade Commission released a study in 2013 which suggests that somewhere between 20 million and 42 million consumers have errors on their credit reports (depending upon the FTC's variable definition of an error).

Consumers have the right to accurate credit reports, a right which is afforded to them under the Fair Credit Reporting Act (FCRA). According to the FCRA, any information which is included on a consumer's credit report needs to be error-free and this includes the personal data which is listed on a consumer's credit report as well.

The Personal Data Section

Not only do credit reports contain information regarding your debts, they also contain a large amount of your personal information as well. The personal data section of a consumer's credit report contains information such as the consumer's name, her aliases (AKAs), her maiden name, her social security number, her date of birth, her address, her previous addresses, and her employer.

Personal data is often referred to as "cosmetic" credit report information. Yes, the information is listed on a consumer's credit report, but it has no influence on a consumer's credit scores. The reason why personal data is not used to calculate credit scores is because it is inconsistent (often provided by the consumer on credit applications) and is not a reliable indicator of credit risk.

How to Check for Personal Data Errors

Thanks to the Fair and Accurate Credit Transactions Act (FACTA) which amended the FCRA in 2003, consumers have the right to access a free copy of their 3 credit reports every year via www.annualcreditreport.com. The best way to ensure that your credit reports remain error free is to check your credit reports regularly. Ultimately, it is up to the consumer and no one else to verify that the information appearing upon her credit reports remains accurate.

NOTE: Consumers do not have free annual access to their credit scores thanks to FACTA. That is a myth. If you wish to pull your credit scores online it is best to compare the different credit score offers ahead of time. CLICK HERE to check out some great credit score and credit monitoring reviews.

Why Incorrect Personal Data Can Be Problematic

As mentioned above, credit report errors in the personal data section of a consumer's credit report are cosmetic. These errors will not help or harm a consumer's credit scores. However, that does not mean that incorrect personal data errors should be ignored. In fact, personal data errors could indicate the possibility of attempted (or successful) identity theft. Furthermore, mistakes in the personal data section of a consumer's credit report could also indicate the possibility of more serious credit errors made by the credit bureaus themselves or by a creditor (or creditors) reporting the data.

How to Correct Incorrect Personal Data

Thanks to the Fair Credit Reporting Act (FCRA), consumers have the right to dispute any information on their credit reports which is believed to be inaccurate. Whether the information is cosmetic or otherwise, if it is listed on a consumer's credit report then it is required to be accurate. When disputing inaccurate personal information (i.e. incorrect name spellings, incorrect dates of birth, incorrect social security numbers, etc.) it is helpful to provide supporting documentation to help prove how the information in question should be reported. As with any other type of dispute, the credit bureaus are required to complete their investigation within 30 days or less in most cases.

Michelle Black is an author and leading credit expert with over a decade of experience in the credit industry. She specializes in the areas of credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Facebook here

Will Paying Collections Help My Credit Scores?

Paying collection accounts is usually the first place people start when deciding to try to fix a damaged credit report. However, the idea that paying off a collection account will boost a consumer's credit scores is, unfortunately, very wrong. The FICO credit scoring model was built to help lenders predict the likelihood of a borrower going 90+ days past due on a loan within the next 2 years. If a borrower is likely to go 90+ days delinquent on an account within the next 2 years then a lender will probably consider the borrower to be a bad credit risk. When a consumer pays off an outstanding collection account, even if a zero balance is reported to the credit bureaus, that does not erase the fact that the delinquency occurred in the first place. Therefore, the FICO scoring model still sees the consumer as a bad credit risk.

It is the occurrence of the delinquency (aka the late payment) which lowers the consumer's FICO scores, not the balance on the collection account. The fact that the delinquency happened is not erased when a collection account is paid. To further illustrate this point, let me ask you a question. Would a $1,000 medical collection, a $100 medical collection, or a $0 medical collection lower your credit scores more (assuming they all were added to your credit reports at the same time)? If you guessed that the 3 collection accounts would likely have the same impact upon your credit scores then you are correct.

Additionally, paying a collection account should accidentally harm your credit scores further due to a deficiency within credit reporting systems which shows "recent activity" on a collection account when a payment is made.  Paying an older collection account, which hasn't reported any activity in several years, could make the collection account appear to be more recent and could potentially result in a drop in credit scores. The reason this occurs is because the credit bureaus will update the "date reported" field when the collection agency reports the new balance ($0 if you paid or settled the debt) and when the "date reported" becomes more recent it can damage credit scores.

However, you do want to exercise caution when it comes to collections since simply ignoring these obligations could come back to bite you. If you have a collection account on your report which you know stems from a real financial obligation and you know that the balance is correct, then it may still be in your best interest to try to settle the debt. Unpaid debt can potentially result in being sued, wage garnishment, and judgments. Remember, if you owe a collection account, you can always try to settle it for a lesser amount and you can even hire a reputable professional to assist you in getting a better deal. Paying 100% of the collection will probably not affect your credit scores any more positively than paying a 5o% settlement in full since the account is already derogatory. Neither scenario removes the collection account from your report, so do yourself a big favor and save yourself some money if you choose to settle any collection accounts. Finally, it is very important to always, always, ALWAYS get proof of the settlement and the satisfaction of the account in writing from the collection agency.

Michelle Black is an author and leading credit expert with over a decade of experience in the credit industry. She specializes in the areas of credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Facebook here