Credit Inquiries and Your FICO® Score: What You Need to Know

How do credit inquiries fit into your FICO® Score?

The FICO scoring formula contains five categories of information, and credit inquiries are included in one of the least-important categories.

Specifically, the "new credit" category of the FICO credit scoring formula contains two main types of information -- credit inquiries and newly-opened credit accounts. Combined, this information accounts for 10% of the formula. However, while credit inquiries aren't a huge part of the FICO formula, they can cause your score to move, so it's important to know some key details.

Hard vs. soft credit inquiries

The first thing you need to know is the difference between hard and soft credit inquiries. Hard inquiries are the only type to affect your credit score.

A hard credit inquiry typically occurs when you apply for credit. If you fill out a credit card application, for example, or fill out a pre-approval application for a mortgage, it will likely result in a hard inquiry.

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On the other hand, a soft credit inquiry occurs either when your credit is checked without your permission, such as for a pre-qualified credit card offer, or when a lender specifically tells you that a pre-approval won't affect your credit score. The latter case is particularly common among personal lenders, who often allow prospective customers to check their rates without a hard inquiry.

How long will a hard credit inquiry matter?

Hard credit inquiries appear on your credit report for two years, but the FICO formula only considers hard inquiries from the past 12 months. Newer inquiries generally have more of an impact than older ones -- in other words, if you applied for a credit card last month, the inquiry will likely have a larger influence than if you applied for a credit card 11 months ago.

If you apply for credit, how much will your FICO® Score drop?

The short answer is "not much." For one thing, a single inquiry is unlikely to cause your FICO® Score to drop more than a few points. As a personal example, I applied for a new credit card a few months ago, and my FICO® Score dropped by two points as a result.

It's also important to mention that you have three main FICO® Scores based on your credit reports from the three major credit bureaus (Equifax, Experian, and TransUnion). Depending on the nature of the inquiry, a lender may conduct a hard inquiry on all three, or just one or two. Mortgage lenders tend to check all three FICO® Scores, while credit card issuers typically only do a hard inquiry with one bureau. The point is that an inquiry might not even show up on two of your three credit reports, so it could have even less of an impact.

Having said all of that, multiple inquiries can certainly cause your score to meaningfully drop, but that's not always the case. My colleague Lyle Daly recently applied for six credit cards in one day, and his score only dropped slightly after the inquiries hit his credit.

One special rule about credit inquiries

Speaking of multiple inquiries, there's a special rule in the FICO formula that encourages consumers to rate-shop for mortgages and auto loans.

Essentially, as long as all of your inquiries take place within a two-week shopping period, they'll be treated as a single inquiry for scoring purposes. In other words, you can apply with 10 different mortgage lenders to find the best possible rate, and it won't affect your credit any worse than if you had just applied with one.

Another potential effect of credit inquiries

As a final thought, it's also important to mention that if a credit inquiry actually leads to a new credit account being opened, it could have a more dramatic effect on your credit score than the inquiry itself.

A new credit account affects two categories of your FICO® Score. As I already mentioned, it's a part of the "new credit" category. There's also a category called "length of credit history," which makes up 15% of your credit score. To be clear, this category includes several time-related factors, but it does consider the average age of your credit accounts as well as the ages of your individual credit accounts. Generally speaking, older is better, so a new credit account could adversely affect your FICO® Score in this category as well.