Over the years I have helped my clients secure over $120 Million dollars in funding and I’ve learned a few important items that lead to success when securing funding for a business. One of the most misunderstood concepts that is constantly be spread across the country is the idea that a few credit inquiries aka “hard credit pulls” are going to drop my credit score 100 points and ruin my life. Today I’m going to tackle this common misconception with the facts of when credit inquiries do negatively impact you and when they are irrelevant to your funding options.
HOW INQUIRIES AFFECT YOUR CREDIT SCORE
So let’s look first at how credit inquiries can affect your credit score, first of all credit inquiries make up about 5 to 10% of your credit score, in most cases the percentage is closer to 5% so will 6 to 8 inquiries drop your credit score 100 points, the answer is definitely no, it might lower the score by 15 to 20 points and that is about the biggest impact. Of course if you go hog wild and have your credit pulled 25 to 30 times in a 30 day period then that could lower your score a lot more, in reality though most people have 2 to 4 credit pulls every 2 months and that is not going to make a big impact on your credit score.
Let’s say that you are looking for a mortgage or an auto loan and you go to a few different mortgage and auto lenders to look for financing. The good news is that the three major credit bureaus will actually count most inquiries that are mortgage or auto loan related as one inquiry when they are pulled within a 2 week window. The credit bureaus understand that you are looking for the best deal and as such they don’t punish you. Now regarding the effect inquiries will have on actually securing the mortgage or auto loan, well the answer is there is really no impact, secured lenders like mortgage lenders and auto lenders know that they have collateral and so in case of a client not making their payment and defaulting on a mortgage or auto loan they can take back the collateral, so what that means is they don’t generally take credit inquiries as an important factor in underwriting your loan. At most a mortgage lender will require a letter of explanation for what the inquiries are. In reality credit inquiries rarely have much of an impact on your ability to qualify for a mortgage or auto loan.
Unsecured credit lines, loans and credit cards are affected much more with inquiries. Unsecured lenders take on more risk than secured lenders so if you try to get a credit card or two and already have several other inquiries on your credit report in the weeks prior to applying for a new credit card then the credit card lender will assume you already secured financing elsewhere and in many cases they will automatically decline your request for a new credit card or credit line. Thus in all of lending the biggest impact that credit inquiries can have on you as a borrower is when you apply for any type of unsecured credit lines or loans. Some lenders nowadays will actually do a soft pull on your credit report which will have no impact, but most lenders will do a hard pull. Either way you will want to pay special attention to hard credit pulls.