Sally wanted to refinance her mortgage to take advantage of the lower rates lenders offered.  She went to the Home Show and spoke to a couple of mortgage brokers there and even filled out an interest form at one booth.  Then she continued on her way around the Home Show and came across a satellite TV booth.

Sally had always wanted satellite TV, so she filled out a form there to sign up.  The satellite TV company ran her credit to see if they could expect to be paid regularly, and Sally got her satellite TV. But she didn’t get the mortgage refinance.  The inquiry by the satellite TV company dinged her credit score just five points, but that was enough to drop her score below what the mortgage underwriter would accept.

That inquiry by the satellite TV company is what’s known as a “hard inquiry.”  More about that in a minute.

“Credit inquiries  are requests by ‘legitimate businesses’ to check your credit” says FICO.com.  Not all inquiries will affect someone’s credit, only “hard inquiries.”  The other kind, “soft inquiries,” can be those where a lender is “reviewing” someone’s credit because he or she has applied for credit with them, such as auto loans, mortgages, or credit cards.  “Soft inquiries” are usually such things as when someone checks his or her own credit score or an employer does a background check.  People need not be concerned with “soft inquiries,” since they don’t affect a credit score or even appear on the credit report that a third-party, such as a lender, employer, or landlord sees.

However, what may usually be a “soft inquiry” can sometimes be a “hard inquiry.”  For example, applying to rent an apartment can end up either way, as can renting a car, opening a checking or money market account, or even requesting a credit limit increase, reports Credit Karma.  Where it falls depends on how the prospective creditor asks for the credit report.  Presumably they had a good reason for choosing either a hard or soft inquiry, so it is not up to someone pulling the report to read into the creditor’s motives why they pulled a “hard inquiry” as opposed to a “soft” one.  Dealing with a mislabeled “hard inquiry” is up to the person whose credit report was pulled.

“Hard inquiries” can indicate that an applicant for credit, a job, or an apartment is about to overload him or herself with debt.  And, as in Sally’s case, that can mean even one inquiry.

There’s a rule of thumb that when people are in the midst of buying a home or renting an apartment, they shouldn’t go out and buy roomfuls of new furniture or a new car that will look good in their new garage.  That could mean when the lender checks credit again, right before funding the loan or offering to rent, the “hard inquiries” will jump off the page and disqualify the buyer right before close or the offer to move in because it looks as if the buyer ore renter will have too much debt.

That’s not the problem of landlords or employers, though.  What they want to watch out for is the credit score itself.  There are a caution, though, to ensure that they don’t run such a tight ship that they end up rejecting someone unnecessarily.

It is the “rate shopping” caution.  If someone has his or her credit checked by multiple landlords, while apartment hunting, say in a 45-day period, those will count only as one inquiry for a credit score.  However, each of those inquiries can appear on the credit report.  For a landlord, that indicates the applicant is looking at more than one place to move.  What’s a landlord to do with that?  It’s entirely up to the landlord.

One thing to use to judge, though, in apartment rate shopping is where the applicant lives now.  If he or she has been living in his or her old room with Mom and Dad, renting an apartment will mean taking on new debt.  That is of concern to any financial institution or landlord who is looking to extend credit. For an employer, though, it’s of no consequence.  Possibly the applicant is looking for a place closer to his or her new work.

To someone looking to extend credit, though, it could be a warning, especially if the inquiries are from businesses in different industries than the one pulling credit, such as what furniture store inquiries might mean for a car dealer.  A houseful of new furniture or move away from Mom and Day might mean a debt that would make the payments on a new car unaffordable for the prospective buyer.

FICO.com explains, though, that it is up to individual lenders to choose which scoring formula it wants the credit reporting agency to use to calculate a FICO score.  That means there are different ways to score and report, depending on how the lender’s request for the report is worded.  That is why people “rate shop,” of course, but it is also a technique to keep in mind when checking an applicant’s credit.  Do you want the “rate shopping” inquiries lumped or reported and scored separately?  One thing to keep in mind is that FICO ignores “mortgage, auto, and student loan inquiries made in the 30 days prior to scoring,” says creditkarma.com.

So poor Sally.  Because she didn’t know how credit scoring worked, and while she really wanted satellite TV, she missed out on a getting a refinance for her home.  Lenders, employers, and landlords do know why and how credit is scored, though.  When they check credit, they can spot the red flags that will affect an applicant’s ability to pay.

By Robert L. Cain

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