Credit Inquiries… why are they bad? ( part 1)

By | March 26, 2013

soft inquiries vs hard credit inquiriesLet’s leave equipment financing alone for a bit and continue with our credit series. I had mentioned in my last credit post (about credit scores) that credit inquiries were bad for your credit. But the question as to “why” comes in – just why are credit inquiries bad for your credit score?

Well, the answer is perception, plain and simple. I should add “the unknown” in there too, as that plays a major factor as well. This will all be clear in a second.

To start, there are two types of inquiries – soft inquiries (when you or one of your current creditors looks at your credit report), and hard inquiries (when a potential new creditor looks at your credit report). We’re going to assume hard inquiries here, as they are the ones that affect your credit score.

Ok, when someone looks at your credit report, they use it to make a judgment on your history of paying back loans and other credit, but they also use it to gauge your current financial picture as well.

Now, that in and of itself doesn’t make inquiries bad. And no, one inquiry every so often is not going to hurt you – it’s perfectly normal. But when you have, say, five loan inquiries in a month, somebody looking at that report will assume you need a lot of credit right now. Plus (and this is where the “unknown” comes in), your credit report doesn’t say if you got credit or not from these inquiries – that can take a few weeks to show up. So if someone sees five inquiries over the last month, they might assume you just got five loans, and still need more. That doesn’t look so good. I mean, would you loan money to someone who’s already been borrowing all over town?

Essentially, that’s it in a nutshell – inquiries tell people you need credit. Lots of inquiries mean you need a LOT of credit.

I know what you are about to ask. You are about to say “But Fletch, isn’t it smart for me to shop around when I am getting a mortgage or a car loan?”

Yes, it is smart, and that’s why this post is part one. Stay tuned for part two in a few weeks.

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