When you apply for any kind of credit, the application triggers a hard inquiry on your credit report which can cause your credit score to drop a few points (although the drop is temporary). The good news is, FICO® scoring models may count multiple inquiries made within a short period as one inquiry — unless you're applying for credit cards.
Confused? CNBC Select explains why FICO credit scoring models treat credit card applications differently and how you can prevent hard inquiries from giving your credit score a hard time.
When do multiple hard inquiries count as one?
If you've recently applied for a loan, such as a car loan, mortgage or student loan, you may immediately notice a hard inquiry on your credit report — especially if you're using a credit monitoring service. For example, Experian free credit monitoring might notify you as soon as a hard inquiry hits your Experian credit report. CreditWise® from Capital One sends an alert when your TransUnion credit report changes.
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But these changes may not immediately affect your FICO score (remember, your credit report and credit score are two related, but separate, things lenders consider). In fact, loan inquiries are ignored for their first 30 days on your report. According to credit expert John Ulzheimer, formerly of FICO and Equifax, this process is called "buffering". And after the first 30 days pass, these inquiries might count as one because of a different process called "deduplication" — or "deduping" for short.
The deduping process treats loan inquiries of the same type that have occurred within the same 45-day period as a single search for credit. Due to this, they're considered as one inquiry for FICO scoring purposes.
"The goal with that logic is to not penalize consumers for rate shopping for mortgages, auto loans and student loans," Ulzheimer says. "So, even if they have multiple mortgage, auto and student loan inquiries, they're likely not looking for multiple houses, cars and student loans, but are instead looking for the best deal."
Shopping around for loan rates is a responsible strategy. It allows you to compare the monthly and overall costs of the loan. The FICO scoring models recognize that and let consumers evaluate multiple offers without worrying about additional hard inquiries.
However, this is not the case with credit card applications.
Why are credit card applications treated differently?
Compared to loans, credit cards provide consumers with plenty of information on their terms and conditions upfront. Most of the time, APR ranges are advertised publicly, allowing you to compare potential interest rates. Plus, when you prequalify or get preapproval for a credit card, it only triggers a soft inquiry that doesn't affect your credit scores.
You only receive a hard inquiry on your credit report when you apply for a credit card. And since the FICO scoring models assume you can responsibly compare different cards without having to ask the card issuer "please extend me credit," multiple hard inquiries signal that you're possibly overextended financially and are at risk of not making your payments. That's why each hard inquiry from a credit card application drops your score by a few points and why multiple hard inquiries within a short period can have a compounding negative effect on your score.
Ninety percent of U.S. lenders use FICO scores, but some lenders also use VantageScore models. VantageScore models look at multiple hard inquiries a bit differently.
"Any hard inquiries that occur within 14 days of each other are considered one inquiry for scoring purposes," Ulzheimer says. "This includes credit card, mortgage, auto, student loan and any other hard inquiries."
If you're considering a few credit cards to apply for, it's best to wait at least six months between applications to protect your credit score.
Fortunately, hard inquiries don't drag down your credit score for long. While they stick around for two years on your credit report, they stop affecting your credit much sooner. "Neither FICO's nor VantageScore's credit scoring systems consider hard inquiries once they've aged past 12 months," Ulzheimer says.
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Bottom line
FICO scores, which are used in 90% of lending decisions in the U.S., may count multiple hard inquiries from loans as one — but that doesn't apply to credit card inquiries. Waiting a few months between card applications might be frustrating, especially if you're trying to rebuild your credit or eyeing a couple of exciting credit card offers, but doing so will help you avoid losing additional credit score points or getting declined.
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