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Hard Credit Inquiries and Mortgage Rates

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Every so often I get an email from readers or friends about credit and credit scores. With the economy recovering, a lot of credit cards are offering large signup bonuses for new cardmembers and they’re very tempting. Open up a card, spend some money, and get a statement credit of $50. The airline cards are even more generous, with some offers up in the 50,000 miles range.

They’re very tempting, especially to someone who is young and doesn’t mind the hassle, but credit cards always result in a hard inquiry and this can be counter-productive if you plan on buying a home or car in the near future. One of the big mysteries of the whole FICO system is how the various factors play into the score but I’ll try my best to get an answer to this vexing question.

How Hard Inquiries Affect Credit Score

I pull my credit score using Credit Karma about once a month, it’s part of my DIY ID theft protection regime. As I was playing around with their Report Card, I click on “Total Hard Credit Inquiries,” as it was my only “B” score. That’s when I saw this chart:
Hard Inquiry Distribution Chart

This chart is a distribution of Credit Karma users and their average score based on the number of hard credit inquiries in the last two years. The 1-2 “B” score is highlighted in orange because that’s where I fall, I applied for and received a Capital One card last year for our trip to Europe. Since then, I’ve kept my nose clean and I’ll move to the 0 inquiry group once two years have passed.

Don’t misinterpret the chart, it’s not saying that 1-2 hard inquiries will cost you 26 points on your score. It’s a little unclear how it affects your score but it’s clear that it has an impact. The lesson here is that you should avoid opening a new line of credit if you’re planning on buying a house in the next two years.

How Credit Scores Affect Interest Rates

According to myFICO‘s list of interest rates on mortgages, a 26 point drop can be substantial (Bankrate has real live mortgage rates searchable by geographic region). If your score is pulled from above-760 to below-760, you could see your interest rate increase from 4.511% to 4.733%. That might look small but it’s a $30 monthly payment increase on a $300,000 mortgage, or $10,800 over the life of a 30 year loan.
MyFICO Mortgage Rates

This is a big assumption to make but if you assume a 26 point drop from a credit inquiry and you shift from the highest to the second highest credit score range, it could cost you ten thousand bucks over thirty years.

Bottom line: Avoid opening new lines of credit if you’re going to get a large loan in the next two years.

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7 Responses to “Hard Credit Inquiries and Mortgage Rates”

  1. MikeZ says:

    Math Error. According to the screencap its a $40 (or more precisely $39.85) difference in the monthly payment or a $14347 difference over the life of the loan.

  2. zapeta says:

    This is a good reminder for anyone who will be borrowing soon….the amount of money you can save with just a minor score improvement is huge!

  3. CreditShout says:

    This is a great overview of what many people would not understand this idea.

  4. Stupid says:

    This is a another great reason that the credit scoring system is stupid.

    • cubiclegeoff says:

      I agree. You can have legitimate hard pulls for a variety of reasons, and be hurt by them. As in many situations, creating policies based on generalized trends makes things worse… simpler, yes, but not better.

  5. eric says:

    I agree. If you’re planning for a large loan like a mortgage, you should definitely keep your credit pristine.

  6. I would think that they would allow the first 1 or 2 inquiries without penalty since there are legitimate reasons for pulling it. Seems a bit harsh.


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