One of the most often heard statement from a prospective borrower to a lender is, “I don’t want you to pull my credit because it will drop my score”. This is like telling a doctor that you don’t want an x-ray before you go into surgery because you don’t want to have to pay for the x-ray. If a lender is going to provide you with the most accurate plan or interest rate for your situation, they have to have a complete record of your credit profile and know what the mortgage score is.
There are many models of FICO credit scores. Each type of FICO score has a different risk model designed for that score. There is a pie chart that shows the components of your credit score. If you look at every credit pie chart example out on the internet, there is a piece of the chart titled “new credit” which typically accounts for 10% of your score.
How Do Credit Pulls Affect Your Credit?
A search into myFICO and Forbes describes this “new credit” as opening several different accounts in a short period of time. If you explore the same topic on Experian, you will see that they mention the “new credit” piece as hard inquiries that lower scores but they also mention that new accounts fit into that category as well. Transunion has a completely different pie chart with different percentages as to what a score is composed. Credit Karma will tell you that a hard inquiry will definitely drop your score. So, to a consumer, this can ultimately seem very confusing as to how a hard inquiry really impacts them. Each model has a different algorithm for how hard inquiries are scored.
Many consumers don’t think twice about the credit pull when they open up a store credit card during the holidays to save money. Also, if they need a personal loan from a finance company, they don’t hesitate to provide the necessary information to allow for that credit pull. So, why the reluctance for allowing a credit pull for a mortgage loan, the largest debt you will likely incur in your lifetime?
If you happen to come across the Consumer Financial Protection Bureau (CFPB) in your researching this topic, you will find that they want consumers to shop and compare mortgage lenders. So, within a 45 day window, multiple credit checks from mortgage lenders will be considered a single inquiry. You will see these inquiries listed multiple times on your credit report but in terms of “losing points” for each inquiry, this will not occur. However, you have to be careful what other things you are doing to your credit in those 45 days. If you miss a payment, open or close credit accounts, or charge up a credit card for example, those may have a negative impact to your score instead of the actual hard inquiry.
Can a Credit Pull Actually Help?
Just like a doctor can fix you once they see the X-rays, in the mortgage industry we have the ability to identify opportunities to improve credit scores if given the time during the process. This results in a rescore of a consumer’s credit. When this is done, another hard inquiry, for the specific bureau that is expecting the improvement, is performed. Yet, if the consumer does what has been suggested from the credit simulators that are used, we see improved scores, even with the new hard inquiry. Hard inquiries have a minimal impact in the mortgage scores. If you are looking to buy a house and want to get the best rate and program options available to you, start early and let us lenders pull your credit so we can see your credit x-ray and work to help you achieve the optimal outcome for your mortgage.
Need to improve your credit? Check out this article.
Kelly Byrne Lee
Home Mortgage Consultant
502-523-3323