Your FICO score determines your eligibility for a loan. Certain things like late payments or overextending your credit obviously hurt your score. What about credit look-ups? Do they hurt your score? You might be surprised to learn the truth – it’s probably not as bad as you think.

Defining a Credit Look-Up

First, let’s look at credit look-ups and what they are. They occur when a creditor pulls your credit. It is the assumption that they do so in order to give you new credit. This can be considered a risk to any new lender. A new inquiry could mean you have new credit out there that has not yet posted on your credit report.

A credit look-up is not when you pull your own credit. If you use a credit service or get your report from a credit bureau, it doesn’t count. This is called a soft inquiry. It does not change your credit score. In fact, credit bureaus encourage you to check your credit to make sure it is accurate. This is a great way to keep your credit score up.

Revolving Credit Look-Ups

One type of look-up you don’t want a lot of is revolving credit inquiries. You don’t usually shop for credit cards. You know the rate and the terms before you apply. If you have an inquiry from a credit card, you likely did so because you opened a new credit card. If you have many of these at one time, it could harm your credit score.

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Other Types of Look-Ups

There are other types of look-ups, though. Such as those that occur when you shop for a mortgage. Let’s say you shop with four different lenders. Each lender will likely pull your credit. They can’t provide you with an accurate quote unless they know your qualification factors. If this is done within a short period of time, such as a few weeks, your score may not get damaged. There is a big difference between rate shopping for a mortgage than trying to take out several credit cards.

The General Penalty for Inquiries

As a general rule, you can assume your credit score will drop 5 points for every inquiry. Again, if you have multiple inquiries from the same industry, it will only get hit once. The good news is, though, 5 points is not very much. If you have a 700 credit score, it may drop to 695. This is not the end of the world. That five points will not make or break your chance to secure new credit.

The Big Picture

Keep in mind, though, lenders look at the big picture. No matter your credit score, they look at everything else. If you have many inquiries, a lender will want to know what they are for. Did you take out new credit? If so, this will play a role in your chance for approval. They also look at your debt ratio, income, assets, and credit history. They look to see your payment patterns. They also pay close attention to those inquiries to see what else you might be up to at the same time.

Counteracting Inquiry Penalties

Even though you only lose 5 points for an inquiry, you still want to maximize your credit score. The best way to do this is to take the following steps:

• Make sure you pay your bills on time. This means your mortgage, student loans, credit cards, and car loans. If you must pay a loan late, make sure it is before the loan becomes 30 days late. This is when your credit score gets hurt.
• Don’t use too much credit. You should aim for using less than 30% of your available credit. This means your total credit. If you have 3 credit cards at $1,000 each, you shouldn’t have more than $900 outstanding in total. This could mean $900 on one card or $300 on each. Anything higher than 30% outstanding can harm your score.
• Watch your inquiries. If you know you need a mortgage in the near future, watch your inquiries. Lenders are leery of those who have a lot of new inquiries on their credit.
• Diversify the types of accounts you have. You should have a good mixture of revolving debt and installment debts. If your credit is heavy on revolving debt, you could harm your score. The same is true if you have heavy installment debt. Diversifying your debt helps lower your score.

Of course, there is no magic way to perfect your credit. You just need to be a responsible consumer. Lenders like to see borrowers that don’t overspend and pay their bills on time. Credit look-ups don’t necessary hurt your score, but they can if you have too many of them. Choose your new credit responsibly and your score won’t be greatly affected.

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