28
Dec

credit impact – 7 common activities that affect your credit scores


Did you know there are seven common activities you are likely to engage in that can affect your credit scores in a negative way?

The seven common activities that can lower your credit scores include: (1) getting a new cell phone, changing your cell phone carrier; (2) connecting utilities such as electricity, natural gas, cable television or satellite television; (3) opening a new bank account; (4) opening a trading account or retirement account with a broker; (5) signing a lease to rent an apartment; (6) getting married; and (7) getting divorced.

I did say credit scores in the plural and not credit score in the singular.

The average adult consumer in the U.S. typically has four credit scores, one from each of the credit reporting bureaus, Equifax, Experian, Transunion, and a FICO score.

FICO scores are used in the automobile, banking, credit card, mortgage, and retail industries. About 90 percent of all lenders use FICO credit scores to determine creditworthiness.

Your credit scores from the three credit reporting bureaus and your FICO score will vary by a number of points because the proprietary scoring models for each of these credit scores were developed separately and different factors are used to calculate the credit scores.

I am going to you use the words credit score in the singular and not plural for simplicity.

Why do such common activities affect your credit score?

These common activities typically result in a new credit inquiry by a third-party, called a hard inquiry or hard pull.

There are two types of credit inquiries: soft inquiries and hard inquiries. Soft inquiries do not affect your credit score. Hard inquiries have a direct effect on your credit score.

Soft inquiries or soft pulls include such events as a person checking their own credit score and the creation of list inquiries by credit card companies, mortgage companies, personal loan companies, etc., to create lists of pre-approved applicants.

When you apply for any type of new credit, a third-party does a hard inquiry on you. The hard inquiry, also called a hard pull, is a review of your credit report by the third-party.

A hard inquiry directly affects your credit score and causes it to go down.

About ten percent of your credit score (i.e., New Credit Obtained factor) is determined by the number of hard inquiries on your credit report.

In general, a single hard inquiry typically reduces your credit score by about five points for about the six months following the hard inquiry.  The exact amount your credit score will go down will depends on your actual credit score and your credit activity and may vary.   A hard inquiry typically remains on a person’s credit report for about two years.  However, most credit scoring models only consider hard inquiries done in the last year.

Why does the hard inquiry cause your credit score to go down?

Credit score rules consider anyone applying for new credit (e.g., a new cell phone, getting married, getting divorced, etc.) to be incurring additional debt. That increases the financial risk associated with extending additional credit or lending money to that person.

Like it or not, numerous hard inquiries are also viewed as a potential indicator that a person is attempting to expand his/her debt limits, or may be experiencing financial problems, both of which increase the risk that the person may not be able to pay back any additional money lent to him/her.

 1.  How can you prevent these common activities from affecting your credit score?

Before you engage in any of these common activities and other, ask the provider of the goods or services if they are going to complete a credit inquiry on you.  If the answer is yes, the credit inquiry will likely result in a hard inquiry.

If you are given a written or electronic application, read the application over carefully to determine if the activity is going to initiate a credit inquiry that will cause a hard inquiry before signing.  This will allow you to make an intelligent, informed decision before purchasing such goods or services.

Be aware of some on-line services, such as those that find you the best mortgage rate or other loan rates, that may generate a large number of hard inquires from different mortgage providers or loan providers. Such on-line services can drop your credit score by a large number of points very quickly.  The policies for such on-line services vary with respect to hard injuries and soft inquires, so read the on-line policies carefully before using.

However, some of the credit scoring models will consider multiple hard inquires as a single hard inquiry provided all the hard inquiries are completed within a pre-determined time period (e.g., 14 days, etc.).

If you are getting married, you may be applying for new joint accounts with your new spouse.  If you are getting divorced, a divorce court will likely require that you close all joint accounts with your former spouse.  Both opening and closing joint accounts is likely to generate multiple hard inquiries.

2.  How can you prevent these common activities from affecting your ability to apply for a large loan or a mortgage?

If you are planning to apply for a mortgage, a student loan or a loan for a large purchase (e.g., automobile, boat, motorcycle, etc.) in the next one to two years, you should try to limit any activities that result in multiple hard inquiries.

Multiple hard inquiries in a short time period have a negative effect on your credit score and can result in you either being placed in a higher risk category for which you will pay a higher interest rate, require an additional payment such as for Private Morgage Insurance (PMI), or having your mortgage or loan application denied altogether.

3.  How can you prevent these common activities from affecting your financial health?

Remember, a credit score is dynamic. It frequently changes, it moves up and down, as your life circumstances change.  If you need a new apartment, a new cell phone, utilities, go ahead and obtain them.  If you are getting married or divorced, these are significant events in your life.  However, just be aware ahead of time of what effects such common activities will have on your credit score.

If your credit score goes down, do not get discouraged. Instead, view the situation from an empowered position, which gives you an opportunity to take control of your actions. Then, make a plan with action steps you can accomplish (e.g., no activities with hard inquires for the next 6 months, etc.) to change to your credit and debt management practices so your credit score will increase again.

Join the conversation on this topic by leaving me comment below or join me on @SLesavich with the hashtag, #creditimpact.

Out There on the Edge of Everything®…

Stephen Lesavich, PhD

Co-author of the award-winning and best-selling book:  The Plastic Effect:  How Urban Legends Influence the Use and Misuse of Credit Cards.

Regular columnist: Positive Impact Magazine

Follow Stephen Lesavich, PhD on Twitter @SLesavich

Copyright © 2016, by Stephen Lesavich, PhD.  All rights reserved.

Photo credit: photo purchased from iStock.