Credit inquiry is initiated which in turn can lower your credit score by as much as 5 points. If you then get turned down for credit, you might even try another credit source thus initiating still another credit inquiry.
The problem, however, is that you now have a lower credit score because the prior credit inquiry reduced your score before this current credit inquiry was even initiated. But you can avoid this counter productive effort of reducing your credit score through needless credit inquiries, by following some selected steps… before the credit inquiry is even a thought in the mind of the loan officer. Here is how to do it.
Credit Scoring Basics vs. Credit Inquiries
Most credit issuance is based upon one thing… your credit score. (For a general discussion on credit scoring see
Credit Scoring Wisdom) Your credit score is generated according to criteria found on your credit report. Each creditor selects a score which satisfies their credit granting criteria and if your score is below that number, you are refused credit. In it’s simplest terms, that is how it works.
Ironically, the problem is that one of the criteria that can lower your credit score by as much as 5 points is a credit application made by the consumer, thus initiating a credit inquiry. The theory is a bit confusing but basically the rationale says if you must ask for a loan you must need the money but you should be penalized for asking so that you do not ask over and over of multiple lenders…. DUH!
It should be noted, however, that inquiries made by junk mailers and such does not affect your score since these are not consumer initiated applications. However, if you respond to one of these offers, then a credit file inquiry is made and your score is lowered. What should also be noted is that if your credit file is perfectly clean, you should not even be concerned about this 5 point penalty on credit inquiries unless you are a new creditor without any history at all.
Therefore the remainder of this article assumes you have a credit file problem or no credit history.
How to Avoid A Credit Inquiry
Many credit inquiries can be avoided by pre planning and by following some very simple steps while asking some very basic questions. But the key ingredient is to not be in a hurry. The greatest mistake folks often make is believing the first deal they run across is the only one that will be offered. Therefore they JUMP at the first opportunity that comes along. Similarly, many folks think a mortgage loan process is the same as a car loan which in turn is the same as a credit card application. They are not, but they all have common traits in pre-planning and in avoiding credit inquiries. So before you apply for any loan:
Get a copy of your credit report and determine if you have a credit problem such as no credit history, bankruptcy, late payments, etc. If you have good credit with no negative comments, apply for the loan since there is no reason you will not qualify. However, if you find a problem….
STOP! Take a breath. Decide what you are trying to do in concrete terms. How much do you need? What is its purpose? What interest rate and payment schedule is acceptable? You can get a ballpark idea of what is available for price and interest rate on the Internet. But do all of this before looking at any neighborhood for a new home, any car on a lot, or applying for any credit card in the industry.
Interview potential creditors before picking up a pen and never give out your social security number unless you are ready for the credit inquiry. For example, do not talk to a car salesman. Tell the salesman you are there on another issue… then make a straight line to the credit office. Similarly, do not talk to a real estate broker until after you have been pre qualified and have a letter to show a broker what you can and cannot do. Telephone interview credit card creditors if applying online. If there is no phone number listed online, you probably should not be dealing with them anyway.
Enter an office fully prepared to walk out. Use common sense but if you have a package established in your mind of what is acceptable to you and it is not offered, be prepared to walk out of “the deal”. They must want your business more than you want their business… this part of the process is a game which you must master. There are more car outlets, real estate brokers, and credit card offers out there and each wants your business.
More ideas to avoid points lost.
Ask some basic questions which are very direct.
“Am I speaking to the car lease financing (mortgage loan officer, credit card issuance, etc.) manager?”. “Who is that manager?” “May I please speak with Mr(s) ———— (whoever the manager is)”
“Mr Manager, my name is ——– and I filed bankruptcy 6 months ago and am seeking a car.
I am considering leasing but very open to your advice on this issue. I have been employed at the XYZ company 8 years and have reestablished credit at my Credit Union. Can you help me? (State your negative side in a positive light.)
You may be asked why you declared bankruptcy and you should have a 15 second prepared response of the basic facts slanted positively to indicate your responsible attitude. Do not tell a sob story… they don’t care. They just want reassurances and they want it within 15 seconds so have a prepared statement in advance.
You may be told you must first fill out an application before discussing it further. If you are, thank them for their advice and go to another creditor.
Under no circumstances give out your social security number until you are confident that you will be approved. Once you release your social security number, you are just about guaranteed a credit inquiry. But if you already know you will be approved, it does not matter.
If the interview is going favorably, hand over a copy of your credit report but blacken out your personal information until you have the answers you want. They will still need to run an inquiry but if they have seen your report, there will be no surprises to turn your loan down.
If you get the answers you want, you are in a position to know if you will be approved. Therefore, the credit inquiry now offers a cost which is acceptable because it will have been productive.
Lenders rely heavily on your credit score to make lending decisions. So why offer them more incentive to refuse you the loan you are seeking? Stop shooting yourself in the foot. If you are going to be turned down by a lender, know about it in advance so that you do not make a bad situation worse. Also watch for the article, “How To Improve Your Credit Score” coming in early November.