In a bizarre twist, you need debt to build credit, but applying for debt causes inquires to build up which hurt your credit. An inquiry appears on your credit report any time a company or individual pulls your credit report. If the pull is connected to a financial transaction, such as a credit card application, your credit scores suffer. Fortunately, inquiries don't appear immediately after you apply -- giving you some leeway when you need extra credit in a financial pinch.
The reason "hard" credit inquiries can count against you is because creditors don't want you applying for numerous credit cards and loans within a short time frame. This indicates you may be in financial hot water. Their thinking is if you're struggling financially, you're less likely to keep up with your debt – and this makes you a greater credit risk to lenders.
A new inquiry won't have an immediate impact on your credit score. Credit inquiries update fast – but not that fast. According to Bankrate.com, you can generally expect to see your credit report updated with a new inquiry within 30 days. A couple of previous inquiries shouldn't make you panic. Lenders understand that periodic inquiries are a necessary part of a healthy financial background, and inquiries generally don't shave more than five points from your credit score. A healthy credit score ranges from 720 to 850, so losing five points won't kill your credit rating.
The game changes if you're shopping around for an interest rate and several lenders pull your report. Five points of credit damage can add up quickly, and the FICO scoring system takes that into account. That's why it counts all rate-shopping inquiries within a 30 to 45-day window as a single inquiry. Each inquiry is dated. So, as long as its within that window, you won't be penalized even if it doesn't show up on your credit report later than others.
Monitoring Credit Inquiries
Since credit inquiries show up on your credit report fairly quickly, they're an excellent early indicator of identity theft. If you're like most people, the last thing you need is someone running around building up debt in your name. Federal law allows you to check all three of your credit reports once a year completely free. By pulling one credit report every four months, you can identify questionable credit inquiries and quash any potential cases of identity theft before they become an unmanageable nightmare.
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