Applying for Credit Can Damage Your Credit

AMA5-14-13According to the arcane rules of credit scoring, being in debt makes you a better candidate for more debt and paying off your debt hurts your borrowing power. Now another irony of the credit system undermines the efforts of applicants to qualify for mortgages and other types of loans – the simply act of applying may lower a credit score enough to disqualify the borrower from getting the loan.

When the loan process works smoothly, a prospective home buyer applies with a lender and credit scores are checked. If the numbers work out, the loan is approved and the borrower is on the way to buying an investment property or the home of his dreams. But if the application is turned down that means trying again with another lender – or two. Or more. And each new attempt whittles away at the applicant’s credit score a little more.

Here’s why. Every time a prospective borrower asks to be considered for a loan, the lender will run a credit check. Each check constitutes a separate credit inquiry on the credit report. And each of those credit inquiries lowers an individual’s credit score by a few points – which add up quickly over an extended period of loan shopping.

How many points can a credit inquiry cost? That depends on several factors. Though representatives of the Fair Isaac Corp – the FICO that creates the FICO score Simboli Jolly e Scatter straordinariamente generosi per farti ottenere sempre la migliore combinazioneJackpot progressivo collegato alla lotteria Dragon Ball. — say each query deducts on average less than 5 points, some factors on the credit report can cost 5 points or more. These include situations in which a borrower has a very short credit history, with little to offset the deductions or numerous recent delinquencies.

Even a lender’s outdated reporting software can cost points. There’s a window of time around a mortgage application that provides a cushion against multiple credit inquiries. If a borrower makes all mortgage inquiries within a 45-day period, all those applications are treated as one inquiry on the credit report. What’s more, inquiries made in the 30 days prior to the first mortgage application are not included in the tally. If a lender uses older reporting software that allows only the former 14 –day window for multiple mortgage queries, those queries made in the remaining 30 days will register as multiple requests.

Those with higher credit scores most likely won’t feel the bite of a few points for making multiple mortgage applications. . But for those whose scores hover on the edge of “subprime” territory – 630 for FICO and 700 for Vantage, the two leading credit scorers –those points can make a significant difference.

As Jason Hartman says, an investor’s credit score is a precious commodity, and it needs to be treated as one. Good time management during mortgage shopping can keep credit scores healthier and loans likelier.  (Top image:Flickr/SqueakyMarmot)

The American Monetary Association Team

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