Thursday 27 Sep 2012

Beginner’s Steps #1: Your Credit Score v.3 – “Hard Inquiries, Soft Inquiries, & Age of Accounts”

This is the 3rd and final post about Your Credit Score in the Beginner’s Steps series. In the last post we learned about Credit Utilization Ratio & how opening new credit cards can actually HELP your score if you’re responsible with them! If you just started reading this series, the first 2 posts about Your Credit Score are here:
1. http://travelandcredit.com/blog/beginners-steps-1-your-credit-score-v-1/
2. http://travelandcredit.com/blog/beginners-steps-1-your-credit-score-v-2-credit-utilization-ratio-myths-about-credit/

I received a few emails from you guys with questions after the first couple posts about Your Credit Score, and everyone asked about “Hard Credit Inquiries” and “Soft Inquiries”. It’s a very important thing to know what they are, how you get one, how they can affect you, etc..
So let’s take a look at that!

HARD CREDIT INQUIRIES:

A hard credit inquiry is the term given when a bank or financial institution, aka “lender” pulls your credit report with your permission generally to potentially offer a new line of credit to the user, or “borrower”. Examples of ways to get a hard credit inquiry include but are not limited to:
- Applying for a new credit card
- Applying for a new loan/mortgage

Sometimes you may also have a hard credit inquiry pulled by applying for a new apartment rental, opening a new cell phone contract, opening a new stock brokerage account, or opening a new bank account. Those options are sometimes soft, and sometimes hard. If you are doing any of those, I would absolutely ask in advance if they will be doing a hard credit pull or a soft credit pull. If you’re like me and you want to maximize your frequent flyer mile intake by applying for huge credit card sign up bonuses with airlines, then you need as much free space on your hard inquiry section of your credit report as possible!

Fact of the day:
- A hard credit inquiry stays on your credit report for 2 years. After that it falls off and is never seen again.

So now you know what a hard credit inquiry is, how you get them, and how long they stay on your credit report. Let’s talk about how they affect you.

A factor in your credit score, and that is looked at by credit approval departments at banks and credit cards is your recent credit inquiries. Now these are all for HARD credit inquiries, not soft. A high number of recent hard credit inquiries may result in an initial decline in credit application for a potential red flag that the user is maybe looking to make a big credit splurge before declaring bankruptcy, or is in a financial hole and needs credit to get out. Of course, you are the responsible financial person who is only taking advantage of the lucrative frequent flyer mile sign-up bonuses, so that does not apply to you!

Generally, a lot of banks and credit issuing companies like Chase, Citi, American Express, etc. will mostly focus on your hard credit inquiries for the last 90 days. This is why many people going after these lucrative credit card offers to travel apply for new cards ever 3-4 months.

“How many credit inquiries can I have and still get approved for credit?”
- There is no “official” answer for this as it depends on who reviews your credit at the bank, how good your reconsideration phone call skills are, and what cards you apply for, but here’s my most recent experience:
I have 20 hard credit inquiries on Experian and was just approved for 2 new credit cards from American Express & Chase.

“Woah David, that is a lot of inquiries!! How will you get any new credit cards?”
Well I know that my hard credit inquiries fall off 2 years from the date of the inquiry, and I’m a smart miles collector so I have a list of my credit inquiries with their dates from my credit report saved on my computer. My credit inquiries are spaced out, so I know when they fall off throughout the next 2 years, and it leaves me room to apply for more cards if the new offers are worthwhile! I also follow the advice that I’ve given in these 3 Credit Score posts, so my credit score is still in the high 700′s and is viewed as “Excellent” by financial institutions.
Take care of your credit score ALWAYS, & it will pay off!

“David, I heard that getting a lot of credit cards is bad if you want to buy a house. Is this true?”
- The basic answer? Yes, this is true for applying for a mortgage or any large loan from a bank or financial institution. Having lots of recent hard inquiries on your credit report from financial institutions will more than likely result in receiving a higher interest rate on a large loan like a 30 year mortgage, or large car loan, which will result in you paying a lot more over the terms of the loan period. Nobody wants to pay more money in interest to the bank right?
If you are planning to apply for a mortgage or large loan, you should not apply for lots of credit cards or other loans. If you want great credit card offers, 1 or 2 isn’t likely to affect someone with a great credit score, but anything more than that I strongly advise against doing until AFTER your approval for a loan, and only IF you can handle the responsible.

SOFT CREDIT INQUIRIES:

Ok, all of that about Hard Credit Inquiries but what is a soft credit inquiry or “soft pull” as sometimes referred to?

A soft pull happens when you yourself pull your credit report or update your credit score for yourself, or when a bank or financial institution uses your credit report to verify your identity. Another common soft credit pull is when a financial institution “pre-approves” you for a “great offer”! I know you’ve seen the junk mail. If you view your free annual credit reports online at www.annualcreditreport.com then you can see both your soft & hard credit inquiries.
Banks and financial institutions cannot see your soft credit pulls, & they do not affect you at all!
This is why checking your credit score frequently, like I recommend, does NOT hurt your credit at all.

So as you can see, Hard credit inquiries are what you want to focus on as soft credit pulls don’t affect you.

AVERAGE AGE OF ACCOUNTS & CLOSED ACCOUNTS:

One last final detail to go over on the series on “Your Credit Score” is your Average Age of Accounts. This is important, and is one of the main reasons why younger people have a hard time getting a high credit score. Average age of accounts is exactly that – the average age of open AND CLOSED accounts on your credit report. Closed? Yes, closed credit accounts (assuming paid off) stay on your credit report for 7 years after they’ve been closed. This is because your credit report is your record of your credit history, whether good or bad. Having a closed card on your account is not bad, but your payment history will remain on there for 7 years after the fact. If you’re trying to cover up past financial mistakes – closing the card won’t cover it up for 7 years.

The accounts on your credit report include all credit accounts, not just credit cards. Loans from financial institutions included!

If you are older and you still have your first credit card that you ever opened, and it is in good standing and there’s no fees to keep it open, then you should NOT cancel it, even if it is just collecting dust in your wallet or in your safe. Why? Because in 7 years after closing it, all of its records and history will fall off your credit report and your average age of accounts will drop significantly. To this day I still have my trusty no-fee Capital One credit card that I opened when I turned 18 with a measly $600 credit limit. I don’t ever use it anymore, but it’s my oldest account still opened, so I don’t ever plan to cancel it!
I’m grateful to my parents for encouraging me to use the banking system for my car loans when I was a teenager and co-signing with me, so that I established good credit history at a young age. If you have kids, maybe you can do the same! They will be pretty frustrated when they apply for their first separate cell phone plan, apartment, or big bank loan and get declined because they have no credit history.

Start young, start right, and stay responsible.

Recap of all 3 Credit Score posts:

- Know your credit score, know what’s in your credit report, & fight what shouldn’t be
- Late payments stay on your credit report for 7 years, so pay on time, always
- Credit accounts going into collection are DETRIMENTAL to your credit score
- Opening a new credit card may actually help your credit score
- Credit Utilization Ratio affects your score monthly, so keep it low
- Maxing out your credit card can lower your score unless you pay the bill early
- Hard credit inquiries fall off your credit report in 2 years
- Soft credit pulls like checking your credit score do not hurt you
- You don’t have to be a millionaire or 50 years old to have a great credit score
- Don’t apply for lots of new lines of credit if you plan to apply for a mortgage or large loan soon
- Canceling your oldest credit card hurts your credit score

Take care of your credit score ALWAYS, & it will pay off!

Leave comments at the bottom about your experiences with credit and any questions so we can discuss!

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