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Why should you avoid frequent credit enquiries?

By Andy Snyder
Published: Sunday, January 17th, 2010

The credit score has become a very important indicator of a person’s credit activities. It is important to lenders who want to find out how reliable the person is and it is also of very great importance to the common man who wants to go out and get a loan.

We will now try and understand how exactly a credit report enquiry will affect your credit score.

An enquiry is generally done by a lender or person who is interested in finding out how reliable you are in terms of repayment of credit. The enquirer wants to weigh out the risk he might be taking in giving you a loan. Enquiries generally take place when you are out shopping for a loan.

There are two types of enquiries, hard enquiries and soft enquiries. Hard enquiries are those that are made by the lenders and soft enquiries are those that are made by you. The soft enquiries will not count towards your score. It is only the hard enquiries that do.

Now coming to the hard enquiries, there are a number of rules based on which the credit report enquiry will actually affect your score.

Firstly, if you are our shopping for a loan, you are going to get a number of enquiries. All these enquiries will not be counted towards your score. There is a period after an initial enquiry during which further enquiries will not be counted towards your score. It is a 20 day period which is called the rate shopping period. Any number of enquiries in this period will be counted as one.

There are two formulas for this, an older one and a newer one. Some lenders use the older FICO formula and others use the newer one. The older one used a 14day shopping period and the newer one uses a 45 day shopping period. Hence to be on the safer side, always limit your shopping period to 14 to 20 days.

Secondly, any enquiry made 30 days prior to scoring is not taken into account. So, if you go out looking for a loan and find one by 30 days, you will not be affected at all by all the enquiries made during the shopping period.

It is also important to keep in mind that each enquiry will take just five points off of your score and your score has a range of around 350 to 800 enquiries will have a very great impact if your credit history is short or you have a very few accounts.

It has generally been found that a person with a higher score is one who basically pays all his dues on time and does not default on payment. Be prudent about your expenditure and take some intelligent steps to make sure nothing bad happens to your score for no reason.

An enquiry out of the blue is just the kind of thing which will harm your score without you actually defaulting on any sort of payment. Just be aware and pay your bills on time and always keep a regular tab on your credit report.

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