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Venturing into the world of credit can often feel like a tightrope walk, where every decision impacts your financial future. Among the myriad factors influencing your credit score, inquiries stand out as both common and misunderstood. But what exactly happens when a lender peeks into your credit history?
This exploration dives deep into the nuances of credit inquiries, shedding light on their duration on your credit report and their potential impact on your financial health. Whether you're applying for a new credit card, seeking a loan, or simply curious about the mechanics of credit scores, understanding the role of inquiries is pivotal.
Join us as we explain the mystery, offering insights and guidance to empower your credit journey.
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What's a credit inquiry?
A
credit inquiry is simply a request for information about your credit history. It's the process in which a consumer asks their lender for permission to take out an additional loan. For this request, the consumer's personal information is sent to the lending company.
This inquiry request does not affect one's creditworthiness, but the primary benefit of an inquiry is to provide data to potential creditors - an example would be asking someone who may be considering applying for a mortgage loan whether they would like to see copies of previous loans.
Credit inquiries are typically used by banks to give a credibility score for future mortgages and other loans.
A lender's check will be performed before deciding on providing finance. It is also used to track whether the applicant has changed address, or had more than one application with a lender recently (which might indicate that he is using credit lines as some form of rent), and it can also show how many different lenders have offered him credit - lending some insights into how the applicant manages his money.
One large inquiry over 3 months, such as an all-inclusive holiday or vehicle purchase finance package, would not affect your overall score as much as if you were obtaining multiple consumer loan products from more than one lender in a short space of time.
There are two main types of credit inquiries - soft inquiries and hard inquiries. Soft inquiries, like when you check your own credit report, do not affect your credit score. Hard inquiries, like when applying for a new credit card, can lower your score slightly for a short period. Too many hard inquiries in a short time can be seen as a red flag by lenders.
How long does a credit inquiry stay on your credit report?
An inquiry for credit or an account review will remain on your report for up to two years. A proposal, application, or pre-approval inquiry will stay on your report for up to six years.
As a rule, inquiries are only reported when they occur in the past 12 months.
Though there are some instances where older inquiries can still be considered by lenders if it is being used as leverage to push the consumer into accepting credit offer terms that are more favorable than those they have already been offered.
When should you review your credit report?
You should review your credit report before you apply for a new credit card or mortgage so as not to miss any errors.
You should also check it after two months of paying off your cards to see what was reported on your statements and compare these with the reports from the three major bureaus.
It is important to do this because even if you pay on time, accounts that close due to delinquency or that don't charge each month can appear as late payments. As such, you need to double-check that all the information matches up correctly and that there are no errors.
When reviewing your credit report, pay attention to your credit utilization ratio. This is the percentage of your total available credit that you are using. Experts recommend keeping this below 30%. Maxing out cards or having a high ratio can negatively impact your score.
The benefits of reviewing your credit report
A credit report is a document that provides a detailed account of your credit history and repayment habits, and it's an essential part of your financial identity.
Credit reports help lenders evaluate how trustworthy you are with borrowing money, which is important when they're deciding whether to lend their money to you or not.
If there are any errors in the information provided by one or all three of the major credit bureaus (Equifax, TransUnion, and Experian), this could result in undesirable situations such as being denied a loan at some point down the line.
Reviewing your credit report will help keep it accurate and prepared for unforeseen errors since most people never check their own score on a regular basis: It lets someone know where they stand with their credit, especially if they are about to apply for a new loan or refinance.
Learn more by reading
Why You Need To Check Your Credit Report Regularly
How often should I review my credit score and what can I do if there's a problem with my score?
The frequency with which you review your credit score depends on your values. If the value of knowing your current credit score is more important than saving money, then it's worth paying for recent updates.
You can pull your own credit score once a year for free at AnnualCreditReport.com. You do not need to go through the three major credit bureaus to obtain your report, and you should definitely check it right before applying for a loan or making an expensive purchase like a car.
If there's ever an error on your report and they refuse to let it be corrected (which has happened in my experience), then dispute the errors with that agency and provide proof that you're right. BTW, if all else fails, take it as high as the Federal Trade Commission.
Credit monitoring services are a convenient way to keep an eye on your credit report and score. These services alert you whenever there are changes or new inquiries made. This allows you to stay on top of your credit and catch any suspicious activity early. There are many affordable monthly plans available.
How to review your credit report
You can view your credit score by visiting
www.creditkarma.com, just enter your information and it will give you an instantaneous free credit score after entering the required data points.
You can also request a free credit report from each of the three major consumer reporting agencies (Equifax,
TransUnion, and
Experian) at
www.annualcreditreport.com.
Nowadays people are living more on their credit cards than ever before which renders having poor credit that much more of an impediment to financial security in the long run. How low is too low?
Your FICO score is between 300-850 with anything lower than, say 550 being considered poor for most purposes of employment or home loans so be sure to check up on yourself regularly!
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