Did you know that every time you have an inquiry, your credit rating is lowered?
It's not uncommon for people to have more than one credit card. In fact, the average Australian has 2.2 cards to his or her name. However, trying secure many different credit cards at the same time is not the best choice to keep your credit rating in good standing.
What's an inquiry?
If you are seeking credit of any kind, the creditor will have you authorise them to make an inquiry to your credit report. Every time you apply for credit, an inquiry is made and reported.
What if I'm shopping around?
If you are, for example, purchasing a vehicle, you may spend some time "rate shopping." Different merchants offer varying interest rates, depending on which lender they go through and the terms they've negotiated. So anyone wanting to make a big purchase on credit will want to shop around.
The good news is that these types of credit inquiries – ones that occur in a cluster and are clearly all for the same item – will result in only one inquiry being reported. (The generally approved time frame for rate shopping is 14 days.)
How do inquiries affect your score?
For the average person of decent credit, one inquiry will have a minimal impact on your rating. A variety of factors could cause an inquiry to have a greater impact on your rating. For example, a person who already holds a lot of credit, when adding an inquiry, will affect their rating more than a person who carries only a small amount of credit.
Someone who has multiple inquiries over a brief time frame represents higher risk, therefore their rating is impacted more.
What's the reasoning?
A recent study by Veda Advantage, Australia's largest credit bureau, has shown that of the more than 14.5 million active credit card users in the system, those who submit many applications at one time are more likely to default on their credit in the coming months.
According to Veda's research, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports.
Veda Advantage Credit Reporting
How can you keep your report clean?
Russell Evans, the General Manager for Veda Advantage, advises that people should research the best rates and best deals possible, but should then narrow their choice down to only a few applications at one time.
While credit inquiries will have some effect on your rating, that effect will be marginal if you maintain a good rating overall. Here's how:
- Pay your debts on time (several days before the due date, to prevent any reporting of late payments).
- Don't default on you loans or file bankruptcy – this will impact your rating for years to come.
- Don't carry more credit than you can manage to keep your risk of doing either of the previous two as low as possible.
- Check your credit report regularly for errors or old, outdated information.
Every Application Counts
One should not take applying for credit lightly. Each and every application should be taken seriously as each one is being recorded, is shown to potential creditors, and could quite possibly have a negative effect your credit rating.
Not only will the tracking of inquiries affect your rating, but it will have the added effect of making it less likely that you will be approved for any credit at all. Lenders won't take risks, especially in this economy.
To keep your credit file clean and your credit rating intact, you should research the best options for you before applying. If you find several excellent deals narrow them down to only a few choices and then apply.Back to top